Digitally Signed by: Content manager’s Name DN : CN = Weabmaster’s name O= University of Nigeria, Nsukka OU = Innovation Centre

Nwamarah Uche

Faculty of Business Administration

Department of Accountancy

INFLUENCE OF INFLATION ON REPORTED PROFIT

FOR DECISION MAKING IN FINANCIAL

INSTITUTIONS IN NIGERIA

CHUKWUEMEKA, MARTINA O.

PG/M.Sc/07/46901

INFLUENCE OF INFLATION ON REPORTED PROFIT FOR

DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA

BY

CHUKWUEMEKA, MARTINA O.

PG/M.Sc/07/46901

DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE AWARD OF MASTERS OF SCIENCES

(M.Sc) IN ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA,

ENUGU CAMPUS

AUGUST, 2014

INFLUENCE OF INFLATION ON REPORTED PROFIT FOR

DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA

BY

CHUKWUEMEKA MARTINA O.

PG/M.Sc/07/46901

DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE AWARD OF MASTERS OF SCIENCES (M.Sc) IN

ACCOUNTANCY, DEPARTMENT OF ACCOUNTANCY

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA, ENUGU CAMPUS

SUPERVISOR: PROF. A.U NWEZE

AUGUST, 2014

INFLUENCE OF INFLATION ON REPORTED PROFIT FOR

DECISION MAKING IN FINANCIAL INSTITUTIONS IN NIGERIA

DECLARATION

This is to declare that this Dissertation by Chukwuemeka Martina O.with Registration umber

PG/M.Sc/07/46901, submitted to the Department of accountancy, faculty of Business

Administration, University of Nigeria, Enugu Campus (UNEC) is original and has not been

submitted in part or in full for the award of any diploma or degree either of this University or any

other one.

________________________ __________________ Chukwuemeka Martina O. Date

(Student) PG/M.Sc/07/46901

APPROVAL PAGE

This is to certify that Chukwuemeka Martina O a Post Graduate Student of the Department of

Accountancy, Faculty of Business Administration, University of Nigeria, Enugu Campus

(UNEC), with registration Number PG/M.Sc/07/46901, has satisfactorily completed the

requirements, for Dissertation research in partial fulfillment of the requirement for the award of

Master of Science Degree in Accountancy of the University of Nigeria.

______________________ _______________

PROF. A.U NWEZE DATE

SUPERVISOR

____________________ ________________

DR. (MRS) G.N OFOEGBU DATE

HEAD OF DEPARTMENT

DEDICATION

This work is dedicated to God Almighty, the Author and finisher of my faith, with Him

nothing is impossible.

ACKNOWLEDGEMENTS I am grateful to God made this, programme possible, I give him all the thanks, adoration and praises. My special thank go to my able and reliable supervisor, Prof. A.U Nweze whose advice,

corrections and help saw this study through. I wish a appreciate my Head of Department Dr.

(Mrs) G.N Ofoegbu for all her assistance and encouragement. And also thankful to Dr. S.E

Ememgini his support and encouragement, you never failed to ask me about the progress of my

work you were always ready to help and answer any question despite your busy schedule.

I must also thank Prof. (Mrs.) Modum, and Prof. (Mrs.) R.G Okafor for their encouragements. I

cannot forget the sisterly encouragements and support of Dr. (Mrs.) E.O Onyeanu. Your

motivations enabled the completion of this work. I am also very grateful to other lecturers and

staff of the Department of Accountancy for their encouragements, they include; Dr. C.M. Odoh,

Dr. O. Aguolu, Mr. S.N. Kodjo, Dr Mrs.S.A. Eyisi, Mrs Obodoekwe, Mr. L.C Odoh, Mrs. C.N

Nwokeoji, Mr. C. Anikwe, Mrs. V. Onyeke , Mr. F. Ayogu, Mr. Chuks and Mrs. F. Okemuo

among others.

I must also appreciate the encouragement of Mrs. C.E Obi the Bursar, UNN. Many thanks also

to the deputy Bursar Enugu Campus, Barr. P.O. Nwokeoji for his fatherly concern. Thank you

sir.

Special thanks also to my colleagues at the Bursary Department, you were very encouraging and

supportive throughout my programme. I owe a million thanks to Dr. M.C Ekwe, Mr. Sunny, and

Mrs. A. Duru for their contributions and motivation.

To my sweet husband Mr. Agustsine Osita Nwiyi and my lovely daughter Osita-Nwiyi Chimdalu

Janefrances, I owe a lot for their support and contributions towards the achievement of his goal.

My sincere gratitude goes to my parents Chief and Mrs. Chukwuemeka Okonkwo, to all my

siblings, to my bosom friend Mrs. J.N Okonkwo, friends, cousins and other relations for their

support are encouragement throughout the period of this programme. May God Almighty bless

and sanctify each and everyone of you

ABSTRACT

The study is on Influence of inflation and reported profit: implication on decision-making. The study was set to achieve the following objectives:, to determine the extent to which lending decision in Nigeria banks were affected by inflation between 2006 – 2011, to ascertain the extent to which inflation has impacted on the reported profits of commercial banks in Nigeria between 2006 – 2011, to examine the extent to which reported profits under inflationary period affect investment decision of Nigeria banks between 2006 – 2011, to find out other factors that influence decisions on reported profit apart from inflation. The research design adopted in this study is ex-post factor research design which is characterized as events that have taken place in the past. The target population of the study is all the banks quoted in Nigeria stock exchange. The sample size is the first two new generation banks (FBN and UBA Plc). Secondary data were sourced from Annual Reports of the banks under study. The data will be presented using sample table frequency and the formulated hypotheses will be tested using linear regression technique. The study discovered that there is no significant positive relationship between lending decision and inflation on Nigerian banks and it is revealed that it could not be established that inflation has adversely affected reported profits on Nigerian banks within 2006 to 2011 fiscal year. Also it was found that investment decisions within the reported profits of Nigerian banks have no direct relationship with inflation within the period under review and finally that inflation on other decision factors (Gearing and Solvency) has no significant relationship on reported profit on Nigerian banks. Also the decision of organization obeys the trends and situation of the economy either in lending or reported profits, investment decisions, gearing and solvency. Thus in the presence of all these factors inflation and reported profit have negative influence on decision-making.

TABLE OF CONTENTS

Title Page i

Approval ii

Dedication iii

Acknowledgments iv

Abstract vii

List of tables ix

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study 1

1.2 Statement of Research Problem 3

1.3 Objective of the Study 3

1.4 Research Questions 4

1.5 Research Hypothesis 4

1.6 Significance of Study 4

1.7 Scope of the Study 5

1.8 Operational Definition of Terms 5

Reference 6

CHAPTER TWO

THEORETICAL REVIEW OF RELATED LITERATURE

INTRODUCTION

2.1 Introduction 7

2.2 Conceptual framework 7

2.2.1 Account for inflation 11

2.2.2 The Nature of Financial Statement 12

2.2.3 Inflation and Capital Investment Appraisal 17

2.2.4. Best Alternatives 18

2.2.5 The object of measurement. 19

2.3 Effects of Inflation and Deflation 20

2.3.1 Effects of Inflation 20

2.3.2 Effect of Deflation 22

2.3.3 General Effects 23

2.4 Impact of Interest Rates on Inflation 26

2.4.1 Stabilization Measures 28

2.5 Management and Control of Inflation in Nigeria 32

2.5.1 Money Policy 32

2.5.2 Determinants of Inflation 33

2.5.3 Impact of Inflation on Investment 35

2.6 Relationship Between Inflation and Profit (productivity) 37

2.6.1 Measurement of Inflation 42

2.6.2 Reasons for the Post-War Inflation 44

2.6.3 Inflation Since 1956 45

2.6.4 The Element of a General Theory of Price Level Analysis 46

2.7 Decision Making 47

2.8 Theoretical Framework 48

2.8.1 Positivists theory 48

2.8.2 Negativist Theory 48

2.8.3 Neutralists Theory 49

2.9 Empirical Review 50

2.10 Summary of Literature Review 55

Reference 56

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design 65

3.2 Nature and Sources of Data 65

3.3 Population of the Study 65

3.4 Sample size of the study 65

3.5 Techniques of Analysis 66

3.6 Model Specification 66

References 68

CHAPTER FOUR

DATA PRESENTATION AND ANALYSES

4.1 Introduction 69

4.2 Test of Hypotheses 69

4.2.1 Test of Hypothesis One 69

4.2.2 Test of hypothesis Two 70

4.2.3 Test of Hypothesis Three 75

4.2.4 Test of Hypothesis Four 80

4.3 Discussions of Results 85

CHAPTER FIVE

SUMMARY OF MAJOR FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.1 Summary of major findings 86

5.2 Conclusion 86

5.3 Recommendations 87

Contribution to knowledge 88

Area of further studies 88

Bibliography

Appendixes

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Inflation is a word that most people hear these days and virtually nobody would like to

experience or come in contact with. Unfortunately it has come to stay with us. Clautier and

Underdown (2001) described it as what hits the consumer’s pocket by eroding the purchasing

power of the currency and sometimes acts as hidden tax. It reduces nation competitiveness in

world markets and can have a general debilitating effect on almost all type of economic

activities. When one thinks of inflation what comes to mind is the dynamic situation of persistent

increase in the price level which results in the diminution of real purchasing power of naira at

your disposal at any time.

Inflation, be it creeping, cost push, wage push or profit push is a condition of unrelenting price

spiral. It has been generally described as a situation of rising prices arising from too much money

chasing too few goods and always results when the aggregate demand exceeds the aggregate

supply of goods and services. It has the net effect of reducing the purchasing power of the

monetary unit. When this reduction in the purchasing power of money is gradual as it was the

case in the early 60s, the recipient of fixed income is not worried. However, when change in

price is a run-away (hyper) inflation as has been experienced in Nigeria since late 70’s the entire

economic system will be at the brink of collapse (Emekekwe, 2008).

However, inflation is not completely dreadful. A certain level of inflation is desirable in order to

ensure sustainable economic growth. Beyond that level, it becomes a hydra –headed monster that

has baffled monetary economics over the years, (Emekekwuse, 2008). At the undesirable level,

inflation greatly affects financial decisions thereby constituting big source of uncertainty in the

economic world.

According to Gill (1997), the issue of inflation in decision making had received very little or no

attention. He attributes this to the fact that much of the literature existing then on economic

analysis has been developed in the USA and other technically advanced nation where the rate of

inflation are comparatively small. In recent time the need has risen for a more precise analysis

because even in some of the advanced economies, the impact of inflation and decision can no

longer be overlooked.

According to Sizer (2000), in the case of consumer price index, Nigeria leads with an annual rate

of 34%. To this effect, virtually all developed and developing counties, capitalist and non-

capitalist have woken up to the reality of the need for accountant to strive to produce inflation

adjusted accounts. This gives rise to the study of “The impact of inflation on reported profit and

its implication for decision-making”.

Decision making requires information which is measured on appropriate basis. Gluatier and

Underdown (2001) argue that the monetary unit of measurement decreases in value because its

purchasing power falls according to the degree of inflation. The consequences of the instability

in the dimension of the unit of measurement in accounting are that objects and events which are

measured in one period of time cannot be compared with similar goods and events which were

measured in subsequent period.

It is important to note that Accountants are still unwilling to provide information to external

users about future expectations, which will be useful for decision making since this will mean

abandoning a tradition based on objectivity. The development of accounting as an information

science concerned with the need for decision makers to require measurements which are relevant

and useful for these needs. In particular, such measurement should possess a high degree of

predictive ability. Unfortunately, the practice in this country possesses serious obstacle to the use

of reported profit for decision– making by external users. The two financial institutions to be

examined in this study are United Bank of Africa (UBA) Plc and First Bank of Nigeria (FBN)

Plc between the years 2006 to 2011. The two banks are quoted on the Stock Exchange and are

deemed to be investment opportunities. UBA was founded in 1949 when the British and French

Bank Limited (“BFB”) commenced business in Nigeria, following Nigeria’s independence from

Britain UBA was incorporated in 1961 to take over the business of BFB. First Bank was

formally known as British Bank for West Africa and was founded in 1894. These two expatriate

Banks dominated the Nigerian Banking scene, until 1933 when National Bank of Nigeria was

established. The two banks were taken over by the Nigeria Government in 1972 and 1977

respectively, and were later privatized to the Nigerian public.

1.2 STATEMENT OF PROBLEM

The world is in the grip of soaring inflation. The inflation if it crosses the single digit is an index

of a weak economy. Inflation can prompt trade unions to demand higher wages, to keep up with

consumers prices. Rising wages in turn can help fuel inflation.

Inflation has negative effects, because it reduces the value of money, resulting in uncertainty of

the value of gains and losses of borrowers, lenders, and buyers and sellers. The increasing

uncertainty which inflation brings discourages saving and investment. It also has serious effect

on reported profits because of high increase in the devaluation of money. The value of the

reported profit today might be less tomorrow because of inflation and the decision made today

on that reported profit may be misleading tomorrow because of inflation.

These problems arise because the financial reporting concept is based on age old concepts which

for long have ignored the presence of inflation and its implication for decision making both by

management and external users of reported profit. Overstated profits are measured in monetary

terms; rising prices will induce external users to make investment decision without appreciating

the consequences of the reduced value of their investment.

The financial institutions that benefit from rising prices also suffer from decreases in savings and

investments. This is because people have become used to the idea that inflation reduces the

purchasing power or their savings and investments.

1.3 OBECTIVES OF THE STUDY

The main objective of this study is to examine inflation and reported profit: it’s implication for

decision-making. Specifically, the study will achieve the following objectives:

(i) To determine the extent to which lending decision in Nigeria banks were affected by

inflation between 2006 – 2011.

(ii) To ascertain the extent to which inflation has impacted on the reported profits of

commercial banks in Nigeria between 2006 – 2011.

(iii) To examine the relationship between reported profits under inflationary period and

investment decision of Nigeria banks between 2006 – 2011.

(iv) To find out other factors that influence decisions on reported profit apart from

inflation.

1.4 RESEARCH QUESTIONS

The research questions were formulated from the specific objectives of the study as follows;

i. To what extent can inflation affect lending decision on Nigeria banks?

ii. How does inflation impact on reported profit of commercial banks?

iii. To what extent does inflation affect investment decision in Nigeria banks?

iv. How do other factors other than inflation influence decision on reported profit of Nigeria

Banks?

1.5 RESEARCH HYPOTHESES

Based on the objectives of this study, the following Null hypotheses were formulated to guide

the study.

i. There is no positive and significant relationship between lending decision and inflation on

Nigeria banks.

ii. Inflation has not adversely affected reported profits on Nigeria banks within 2006 – 2011

fiscal year.

iii. Investment decisions within the reported profits of Nigeria banks have no direct relationship

with inflation within the period under review.

iv. Inflation on other decision factors ( Gearing and Solvency ) has no significant relationship

on reported profit on Nigeria banks.

1.6 SIGNIFICANCE OF THE STUDY

The study will be significant to the researcher, to Government, to management of banks, to the

general public and to educationist.

To the researcher: This study will add more to the knowledge bank of the researcher in the

subject area of the impact of inflation on reported profit and its implication for decision making.

To the management of banks and Government: This study will spur them to have a rethink on

the need for inflation accounting and appropriate profit report.

To the general public: The study will help them make more rational decisions through

understanding the value of their future savings and investments.

To educationists: The study will not only serve as a basis for further research into impact of

inflation on investment decisions, but also add to the existing knowledge base in this crucial

economic study.

1.7 SCOPE OF THE STUDY

This study focuses on the impact of inflation on reported profit and its implication for decision-

making in selected financial institutions in Nigeria. It will focus on the period of 2006 to 2011.

The two banks under study are all the banks whose shares are quoted on the Nigeria Stock

Exchange before the 2005 concluded consolidation exercise. The choice of this to ensure data

availability to enhance the achievement of the study objectives.

1.8 OPERATIONAL DEFINITION OF TERMS

1. Inflation: According to Spencer (1974), inflation is: What hits the consumer’s pocket by

eroding the purchasing power of the currency, sometimes acts as a hidden tax, reduces a

nation’s competitiveness in world markets, and can have a general debilitating effect on

almost all types of economic activity. The adorer is Inflation.

2. Discount cash flow (DCF): Is a technique of financial analysis that is applied under (a)

Net present value (NPV)

(b) Profitability index (pi)

(c) Internal Rate of Return (IRR)

3. Net Present value (NPV): According to Nagarajan (2010), NPV of a project is the

present values of all the cash flows, be it negative or positive from the project that are

expected to occur over the life of the project.

4. Decision making: According to Ugbam (2001) decision making is a process whereby

management when confronted by a problem selects a specific course of action from a set

of possible courses of action.

5. Reported profit: This is the annual report of the performance of a firm or an

organization at a particular period.

REFERENCES

Angus, Maddison (2006), Economic Progress and Policy in Developing Countries. New York:

Routledge Company.

Bardam, D.M. (1990), Research Method in Administrative Science, Port Harcourt: Belk Pub.

Ltd.

Benabou, R. and Gertner, R. (1993) “Search with Learning from Prices: Does Increased

Inflationary Uncertainty Lead to Higher Mark-Ups?” Review of Economic Studies,

60(202).

Bodie, Z, Kane, A. and Marcus, A. (2004), Essential of Investments. 5th Edition. Boston:

Irwin/McGraw-Hall.

Borenstein, S; Cameron, A. C.; and Gilbert, R. (1997) “Do Gasoline Prices Respond

Asymmetrically to Crude Oil Price Changes?” Quarterly Journal of Economics, 112(1).

Browne, B. and Coxon, T. (1981), Inflation Proofing your Investments. New York: William

Morrow and Company.

Calautier M. W. E. and under down (2001) Accounting Theory and Practice, London, Financial

Times Prentice Hall.

Case, K. E. and Fair, R. C. (2009), Principles of Macroeconomics, 9th Edition, Englewood Cliffs:

Pearson Education.

Emekekwue, P. E. (2008), Corporate Financial Management, Enugu: Snapp Press Ltd.

John, Sizer (2000), An Insight into Management Accounting, 3rd Edition, London: Penguin

Books Limited.

Odo, Maurice Ozongwu (1992), Guide to Proposal Writing in Social Behaviors, Enugu: SNAPP

Press Ltd.

Richard, Gill (1997), Economics, New York: Prentice Hall International Inc.

Ugbam, O. (2001), Quantitative Technique an Introductory, Enugu: Chirol Publishers.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 INTRODUCTION

An extensive review of conceptual, theoretical and empirical, examine the micro foundations of

the links between inflation and profit. In contrast, little research has been done on how inflation

affects profit margins. The accounting profession has spent a lot of time examining how inflation

affects a firm’s financial statements with emphasis on how inflation changes the way companies

report revenues and costs. Research on the inflation and reported profit generally focuses on

behaviour of a markets and the operation of the business. A model of the inflation underlies the

aspect of the origin and characteristics that embodies the operationalizing, tracing and reaction of

the marketing. Each of these models constructs inflation as a shock to the supply function.

2.2 Conceptual Framework

Sheshinski and Weiss (1977) study a monopolistic firm that faces a cost for adjusting its selling

price. The seller optimally follows an S,s pricing rule in an inflationary environment. He

maintained that a constant nominal price until inflation erodes his real price below s, and then he

will increase his nominal price to S. As inflation increases, S increases and s falls; thus the

magnitude of a price change increases.

Given monopolistic competition, Benabou (1988, 1992a) introduces the idea that the larger and

more frequent price adjustments of S,s pricing during inflation offers consumers a scope for

search. In equilibrium, consumer search is optimal given the price dispersion that results from

the staggering of S,s pricing rules. Welfare effects depend upon the size of consumer search

costs. Low search costs allow consumers to take advantage of price differences that lead to

increased competition and positive welfare effects. High search costs imply even greater

equilibrium prices and more price dispersion. The wasteful search costs and higher prices have

negative implications for welfare.

Diamond (1993) follows a similar strategy, but develops his model with “sticker” prices. Prices

are literally affixed to the good itself. The “sticker” can only be changed at some cost. Inflation

reduces the real price of a “stickered” product sitting in inventory. The presence of the older

priced goods lowers the reservation price of the consumers. Inflation actually reduces market

power because consumers search for goods with the old sticker price. There is price dispersion,

but less market power.

Only a few theoretical papers touch on the issue of how inflation affects profit levels. This work

follows Lucas (1973) and studies the impact of inflation uncertainty on price markups. Benabou

and Gertner (1993) introduce a stochastic shock on the costs of producers and examine the effect

of inflation uncertainty on price dispersion. In this model, consumers cannot distinguish between

aggregate and relative shocks. Consumers can decide to enhance their information with search

and must infer from prices whether it is worth the cost to search. Benabou and Gertner find

increased inflationary uncertainty has two effects on welfare. First, there is a correlation effect. If

seller prices are correlated, inflation makes consumers search less when they observe a high

price. However, consumers search more when they observe a low price because they believe

better prices may be available. Second, there is a variance effect, because buyers can return to

the first seller costlessly, an increase in inflation uncertainty increases the option value of search.

Increased inflation uncertainty promotes search and lowers the sellers’ market power.

Benabou and Gertner show that increases in inflationary uncertainty lead consumers to seek

more information. In equilibrium, consumers are better informed and prices adjust to the increase

in competition. The main result of Benabou and Gertner (1993) is that the effect of inflationary

uncertainty on market efficiency depends critically on the magnitude of buyer search cost. Low

search costs make it possible that the benefits from an increase in inflation uncertainty outweigh

the costs. Increased price competition may result in a benefit that is higher than the buyer’s

search cost. High search costs lead to the opposite result. An increase in inflationary noise allows

sellers to charge higher real prices as they take advantage of the consumers’ reduced

information. Thus, high buyer search costs imply higher firm profit margins and decreased

efficiency.

Van Hoomissen (1982) and Tommasi (1994) show that inflation lowers the in formativeness of

current prices about future prices. Prices become outdated quickly, which leaves the consumer

less well informed. Tommasi shows that the lower information stock translates into higher

consumer reservation prices. Repeat purchase consumers thus have less incentive to acquire

price information. Less well informed consumers permit firms to raise their markups which

results in price dispersion.

The empirical literature on inflation and price dispersion generally supports the above theoretical

papers, but there are some exceptions. Weiss (1993) provides an excellent survey of empirical

findings from microeconomic data on the issue of inflation and price adjustment. Two empirical

regularities are generally recognized. First, nominal price changes occur in discrete jumps. This

is clearly consistent with S,s pricing theory. Second, as inflation increases, the variance of

relative prices (price dispersion) also increases. This supports all of the aforementioned

theoretical models.

Benabou interprets his findings as support for the prediction that S,s pricing theory under

inflation would lead to higher price dispersion. With low consumer search costs, price dispersion

promotes search and competition intensifies leading to a decrease in markups. Borenstein,

Cameron, and Gilbert (1997) document asymmetric gasoline price responses to crude oil price

changes and argue that the data is not inconsistent with the implications of the Benabou and

Gertner model. In gasoline markets, increases in inflation uncertainty do translate into higher

profit margins.

Gill (1973) defines inflation as any general increase in the price level of the economy in the

aggregate. This is a Macroeconomic concept while in microeconomics, one may be concerned

with a rise in the price of one commodity relative to other commodities, inflation involves a rise

in the price of all commodities or of most commodities or most commonly of some index that

measures the average of various prices taken together. This definition is still a bit general;

Maddision (2006) observes that one might wish to know exactly what prices are being included

in any particular index of inflation. In Nigeria there are three main indices of inflation in

common use:

1. Index of consumer prices

2. The wholesale price index and

3. The GNP Price deflator

The third index which reflects the distinction between changes in real GNP and changes merely

in money GNP is the most general of these indices, Maddison observes that in less developed

countries and especially in Latin America and Africa rapid year –to-year or even month –to

month inflation is a fairly common occurrence. Gill (1975) posited that Keynesian view of

inflation is one where inflation is caused by an aggregate demand for goods and services that

exceeds national income at the full –employed level.

Sizer (2000) observes that the problem of inflation on reported profit stems from the way the

profits are measured by accountants. He posited that accountants measure profit by finding the

difference between the net assets at the beginning and end of the accounting period. They match

the actual revenues of the period with the actual expenses of the period, and to the extent that

revenue exceeds expenses, there is a profit. However under the historical cost accounting system,

the matching process may be of revenue of the period with cost of an earlier period, they do not

necessarily match current values. Further more the balance sheet is made up of a mixture of naira

of different periods, depending upon the mix of assets, the age structure of the assets and

depreciation policies. He concluded that an overstatement of profits and an understatement of

assets employed will occur in time of rising prices if any output costs of one date are matched

without output revenues of a later date, and if assets are shown in the balance sheet at their

historical cost this will arise in the case of:

1. Depreciation in the profit and loss account and fixed assets in the balance sheet

2. The charge for stocks and work –in- progress consumed in the profit and loss account

and stocks and work –in- progress in the balance sheet.

Lucey (2000) posits that if the assets are depreciated on the basis of historical cost and stocks and

work-in progress on a first-in-first-out (F.I.F.O) or similar basis, part of what accountants

calculate as profit will be required to maintain the capital of the business intact. Part of the profit

will be required to cover the increased cost of replacing fixed assets and stocks which were

bought or produced at prices considerably lower than those ruling as at the date of consumption.

If a company distributed as dividend the whole of its historical cost profit, it will have

insufficient cash left to maintain it’s present level of stocks and work –in progress and replace

it’s fixed assets

Wood and Townsely (1980) argue that if as a result of inflation profit is seriously overstated, the

burden of taxation on the business will be greater than that implied by the nominal rate of

taxation. If reported profit, which result merely from a change in the value of money, or capital

gains arising for the same reason, are taxed as if they are real income to the business, then the

ability of the company to maintain the capital of the business intact and sustain real growth will

be diminished furthermore, if historical cost profit are the basis for profit margin control under

price legislation, a company’s ability to generate adequate cash during a period of high rate of

inflation will be seriously impaired.

2.2.1 Account for inflation

Seizer (2000) maintains that the problem of how the effects of inflation should be reflected in

accounting statements is indicated in the provisional statement of standard accounting practice

No.7, issued in May 1974. The United Kingdom accounting standard steering committee

recommended that companies should employ the current purchasing power method (C.P.P) to

produce for their shareholders a supplementary statement in terms of the value of the pound at

the end of the period to which the accounts relate. The provisional standard was issued pending

the report of the independent committee of inquiry (The Sandilands Committee) established in

July 1973 by the then Secretary of State to consider the various method of adjusting company

accounts and whether, and if so, how company accounts should allow for changes in cost and

prices. According to Sizer (2000) in its Report the Sandilands Committee rejected the C.P.P

method; largely on the basis of it is application of general indices to specific assets, but also

because it involves expressing accounts in terms of Purchasing power units rather than money .It

recommended the current cost accounting system (C.CA.) which is based on maintaining the

value to the company of its existing assets. The main features of C.C.A are:-

i. Money is the unit of measurement.

ii. Assets and Liabilities are shown in the balance sheet at valuation.

iii. Operating profit is struck after charging the value to the business of assets consumed

during the period, this excluding holding gains (i.e. differences between original cost and

value to the business) from profit and a showing them separately.

According to Sizer (2000) observes that the consultative committee of accounting bodies

informed the Government that the current cost accounting system proposed by the Sandilands

committee could prove to be an acceptable and practical method of accounting for non- monetary

assets (fixed assets and stocks) as their Current value. The consultative committee considered

that the current cost accounting system proposal by the Sandilands committee does not deal at all

or does not deal adequately, with the effect of inflation on the value of the proprietor’s interest in

the company or other organization concerned. The consultative committee recommended that at

least the reporting organization should show prominently the change in the purchasing power of

the capital invested during the period covered by the report. The government announced that it

agreed that the current cost accounting system method could lead to a better understanding of the

economic performance of companies. It also endorsed the recommendation that the detailed

practical problems should be examined urgently and the accountancy profession agreed to set up

a steering group for this purpose with a view to the implementation of current cost accounting

system. in company accounts for all periods beginning after 24th December 1977. An inflation

accounting steering Group under the chairmanship of Mr. Douglas Morpeth was established by

accounting standards steering committee in January 1976, and its ninety three page Exposure

Draft (E.D.18), current cost accounting was published at the end of November 1976.

2.2.2 The Nature of Financial Statement

The group consultative committee of accounting set by HMS proposed a phased introduction of

the accounting standard to be based on the exposure draft for accounting periods beginning on or

after 1st July 1978. The system of current cost accounting system proposed in E.D 18 to replace

historical cost accounts distinguished between.

Operating profit: Revenue less current expenses, including in those expenses the value to the

business of the physical assets consumed during the year.

Extraordinary items: Losses and gains arising not in the normal course of the business.

Holding Gains and Losses: The surpluses or deficits for the year arising from revaluing

physical assets to their current value to the business.

Operating profit and extraordinary items would appear in the profit and loss account and holding

gains or losses in a profit and loss appropriation account. In the balance sheet Physical assets

(fixed assets and stocks and work –in –progress) would appear at their current value to the

business. Sizer (2000) maintains that the E.D. 18 proposals contained no precise

recommendations on how accounts should be taken in the current cost accounting system of the

effects of inflation on monetary items, which partially offset the effects of inflation on

operating profits. It stated that the director should transfer from the net surplus on revaluation of

assets to a revaluation reserve in the balance sheet an amount they consider should be retrained

having regard to the needs of the business. He observed that there was limited guidance as to

how this transfer should be determined. It was also proposed that the published accounts should

include a statement, by way of a note, setting out prominently the gain or loss for the period of

account in the shareholders net equity interest after allowance has been made for the change in

the value of money during the period.

The relationship between the profit and loss account, the profit and loss appropriation Account,

and the balance sheet under the E.D 18 system of current cost accounting system, as perceived

by the author, is illustrated in figure. Exposure Draft 18 was widely Criticized by accountants in

the Profession, in industry, and in commerce their concerns included the complexity of the

Proposals, the element of subjectivity inherent in their application, their inappropriateness to

small and medium-sized companies, the failures to make an adjustment specially to the account

of the effect of inflation on monetary items, and the replacement of historical cost accounts by

current cost accounts before current cost accounting system has been proven to be the

appropriate system of accounting for price level changes. The Criticism culminated in a

resolution being passed at a special meeting on 6 July 1977, ‘that the member of the institute of

chartered Accountants in England and Wales do not wish system of Current cost accounting o be

made compulsory; in the light of this rejection of E.D.18, the Accounting Standards steering

committee accepted the need for a ‘Substantial simplification and modification of the E.D.18

Proposals. They requested the morpeth Group to make a careful assessment of comments on the

Proposal and to prepare a new exposure draft. As an interim measure they established a new

group under the chairmanship of Mr. William Hyde, to prepare Simple guidelines for

Supplementing historical cost result with a current cost accounting system profit-and-loss

Account whether practical foe the year to 31 December 1977.

The Hyde Group Guideline were approved and published by the Accounting Standards steering

Committee in November 1977. The Accounting Standards Committee recommends that the

published financial statements of companies listed on the stock Exchange should include a

prominent statement showing the financial results as amended by three adjustments, each shown

separately.

(1) Depreciation: An adjustment should be made for the difference between depreciation

based upon the current cost of fixed assets and the depreciation charged in computing the

historical cost result. Where other appropriate methods have not been developed, the

charge for current cost depreciation may be computed by use of an appropriate index of

price movements.

(2) Cost for Sales: An adjustment should be made for the difference between the current

cost stock at the date of sale and the amount charged in computing the historical cost

result.

(3) Gearing of monetary items: It is recognized in the guidelines that there are differing

views on the question of how monetary items should be dealt with in inflation- adjusted

accounting but argued that an adjustment must be made if an incomplete and potentially

misleading picture is not to be given to share holders and other users of the accounts.

They recommend the following approach to the calculation of the gearing adjustment

unless another method is preferred.

a) Where the total Liabilities of the business, including preference Share capital, exceed its

total monetary assets, a Calculation should be made of the Proportion of the net balance

of monetary assets to the net balance of monetary liabilities Plus equity and share capital.

An amount equal to this Proportion of the depreciation and cost of sales is to be shown in

the statement.

b) Where the total monetary assets of the business exceed its total Liabilities, an adjustment

should be calculated by applying to the net balance of monetary assets, the Percentage

change in an appropriate index during the accounting year. This adjustment should be

charge as a separate item in the statement.

Despite the Crudeness of the gearing adjustment, the interim guidelines were welcomed by the

auditing profession, accountants in industry and commerce, and by the stock Exchange as a

workable step towards a more comprehensive system of current cost accounting. The Morpeth

Group continues its work on the development of such a system for consideration by the

Accounting Standards committee. Many large organizations are pressing ahead with the

development of comprehensive system of current cost accounting to produce inflation adjusted

accounts for use by management and investors.

Relationship between Balance sheet, Profit and loss account and Profit and loss

appropriation account under E.D 18

Balance sheet

Show Sources and Uses of Capital at a Point in time. Sources of Capital Asset Employed Ordinary shareholders investment Fixed Assets

• Issued Share Capital Buildings

• Share premium Account Plant and Machinery

• Revaluation Reserve motor vehicles, etc

• General Reserve INVESTED Deferred Taxation Net Current Assets Long-Term Loans Stocks and Work-in-progress Debtor Cash Less Creditors Current Taxation

Financial Director’ job is Short-term Borrowings

To minimize Cost of Capital Dividends payable

EMPLOYED

PROFIT-AND- LOSS APPROPRIATION ACCOUNT Shows profit and revaluation surpluses/deficits arising during period and how appropriated Current cost profit for year Net surplus for year on Revaluation of Assets

Req

uir

ed T

o M

ain

tain

C

apit

al I

nta

ct

on

Lo

an C

apit

al

To manufacture and market goods and service which generates expenditure and income which is shown in

PROFIT-AND-LOSS ACCOUNT

For a period Sales Cost of sales Operating profit Interest payable Current cost profit before taxation Corporation tax Current cost profit for year

TRANSFERRED TO

TO

FIN

AN

CIA

L G

RO

WT

H

To

2.2.3 Inflation and Capital Investment Appraisal

According to Sizer (1989) the persistent high rate of inflation in some western European

countries and north America during the 1970’s has led accountants to consider more carefully

how to take the effects of inflation into consideration when determining a company’s cost of

capital and evaluating investment project as well as in the preparation of financial statement. He

observed that the higher the rate of inflation the greater the value of the money receivable today

compared with money receivable in the future. The implication of this statement to decision-

making means that in the theory, the higher the rate of inflation the higher the rate of interest the

investors will require if he is to be persuaded not to consume his income today but to invest

money in return for receiving annual dividends or interest payments and the repayment of his

investment in the future.

Lucey (2000) posits that in practice, investors do not always act rationally. Therefore the higher

the rate of inflation, the higher the rate of interest the investor requires and the higher a

company’s cost of capital in money terms. How much higher a company’s cost of capital in

money terms will be compared with its cost of capital in real terms will depend not only upon the

expected future rate of inflation but also upon the company’s gearing and when it raises fixed

interest loan capital. He observed that in case of loan capital, once raised, the fixed interest

payments in money terms remain constant, unless the interest payment are index-linked for

inflation and under conditions of inflation the cost of existing loan capital in real terms declines

over the period of the loan.

Source: Her Majesty Stationery Office, 1977 London (Now the Stationery Office, TSO)

Sizer (2000) argues that not only does inflation affect a company’s cost of capital; it will also

affect the cash flows arising from an investment project. He went on to state that when

evaluating proposed investments under condition of inflation a company has to decide whether:

1) To forecast the cash flows arising from an investment project in today’s pounds

throughout the expected life of the project and ignores inflation i.e. In real terms or

2) To take account of expected future rates of inflation and to forecast the cash flow in terms

of the actual cash receipts and payment that are expected to arise during each year of the

project expected life. i.e. in money terms.

Lucey (2000) observes that if a company forecasts cash flow for a proposed capital project in

money terms the D.C.F rate of return or NPV of a project is likely to be higher than the D.C.F

rate of return or NPV in real terms. He stated that the higher the rate of inflation the greater will

be the difference between a companies’ cost of capital in real terms and its cost of capital in

money terms. For these reasons it is important that if the cash flows are calculated in money

terms the D.C.F. rate of return for the project is compared with the company’s cost of capital in

money terms.

Sizer (1998) posits that if a company ignores inflation and determines cost of capital and

evaluates investment projects in real terms it is in effect; assuming that future rates or inflation

will affect equally the cost of different types of finance and all elements of an investment project.

In fact, this is likely to be an unrealistic assumption. He recommends that a company evaluates

investment projects not only in money terms and compares these with the company’s cost of

capital in money terms but also the separate rates of inflation are forecast for the different

elements of a project. He concluded that it is important when testing the sensitivity of the

profitability of a project to variations in the key assumptions in the evaluation that the

assumptions about rates of inflation are treated as key assumptions and included in the sensitivity

analysis. Similarly if risk analysis is under taken, subjective probabilities should be attached to

the fore cast range of rates of inflation

2.2.4. Best Alternatives

According to Sizer (2000) the importance of selecting the best alternatives for investigation and

evaluation cannot be over emphasized. A creative search for investment opportunities is

required. He observed that a number of surveys undertaken in the 1960s of the methods of

investment appraisals employed in the U.K. came to the conclusion that companies used methods

which are not likely to lead to the optimal choice of investment projects. As a result D.C.F

techniques which have not been widely used in the U.K. received Considerable Publicity.

Successive governments have emphasized the importance of increasing the level of industrial

investment in the U.K. This means that firms should be seeking profitable investment

opportunities and correctly appraising them. He concluded that where D.C.F techniques are

important is in choosing between alternative projects in a capital rationing Situation. Account

should be taken of expected rates of inflation and cost of capital should be determined by

appraisal in money terms.

Davis and Hughes (1975) argue that if we take account of inflation, it becomes clear that

discounting by the firms cost of capital is no longer sufficient to indicate the desirability of

accepting a project. The discount rate must therefore be adjusted to allow for inflation and in

addition to this, the cash flows must also be adjusted to show their future inflated value. Projects

will otherwise continually be made to look less desirable than they actually are. The formula for

this adjustment is m = n

∑ (money value of net cash flow)m

m = 0 (money rates of interest) m

2.2.5 The object of measurement.

According to Glautier et al (2001) measurement are required not only to express objectives as

clearly defined targets about which decisions must be made, but they are also required to control

and to assess the results of activities involved in reaching those targets. In accounting, the

standard of measurement is the monetary unit. Unfortunately the use of a money standard of

measurement has its disadvantages. To begin with the accuracy and reliability of standards of

measurements depends upon the stability of the unit of measurement.

Lucey (2000) argues that an essential requirement is that the dimensions of the unit of

measurement should remain constant. Unfortunately the monetary unit of measurement

decreases in value because it’s Purchasing power falls according to the degree of inflation. This

problem, he observed, are common to all countries which is suffering the effects of inflation. The

consequence of the instability in the dimensions of the unit of measurement in accounting is that

objects and events which were measured in one period of time cannot be compared with similar

goods and events which were measured in Subsequent period. He concludes that it is now

admitted that a correction is needed to the unit of measurement if accurate measurements and

comparisons are to be made.

Glautier et al (2001) postulate that the development of accounting as an information Science

concerned with the needs of decision makers requires measurements, which are relevant and

useful for these needs. In particular such measurements should possess a high degree of

Predictive ability.

2.3 EFFECTS OF INFLATION AND DEFLATION

2.3.1 Effects of Inflation

Inflation is generally regarded as undesirable because it produced serious social and economic

problems. It leads to arbitrary redistribution of real income, According to Okoro Okoro

(2004)Although a rise in the price level produces a corresponding increase in money incomes,

all prices do not rise to the same degree, and different income groups will be affected in different

ways.

i. Price instability distorts choices and Redistributors’ income: Inflation and its

opposite deflation, is a disorder of choices and a capricious redistributors of income.

Eratics changes in the price level distort choice because people base their decisions not

only on the benefits and cost they incur when buying and selling but also on their

assessment of changes in price level. Eratic changes in the price level inevitably cause

changes in the distribution of income. There is always gainer and loser as a result of

inflation. Inflation tends to increase inequalities in distribution of income and wealth.

ii. Inflation Distorts Savings and Investment: Erratic inflation is particularly troublesome

for longer contracts. It increases the risks involved in estimating the returns on

investment prices. This might lead to distortions in decisions to save and invest and cause

investment to be reduced below the efficient level. Inflation can adversely affect the

growth of the economy by reducing the willingness of households to supply funds to

businesses for productive investment. If inflation soars, savers might seek to liquidate

their financial assets and purchase lands or items like antiques and other collectibles.

Inflation not only distorts current choices but also can decrease confidence in the nation’s

financial markets, thereby adversely affecting future opportunities as the amount of

savings channeled into productive investment is reduced and a nation’s real GNP growth

rate can be adversely affected.

iii. Impact on International Trade: Changes in interest rates, money supply and the price

level can affect the ability of Government firms to compete with foreign suppliers. High

interest rate on loans resulting from high inflation in the economy discourages individual-

investors and business who need funds to make productive investment from taking loans.

iv. Effect on Income Groups: The effects on incomes derived from profit depend upon the

type of inflation. The losers, during an inflationary period, are those whose incomes are

fixed, or relatively fixed in money terms. This group includes those incomes derived

from fixed interest securities controlled rents and some private pensions Schemes. In

Similar category are those people receiving salaries or pensions, which are adjusted only

after long time interval. All income recipients in this group will suffer a fall in their real

income. During demand pull inflation profits will tend to rise. The prices of final goods

and services are often more flexible in and upward direction than factor prices and the

margin between the two price levels tends to widen because of time lag. When cost- push

inflation is being experienced, profits tend to be squeezed since there is no excess

demand.

I. Effects on Debtor-Creditor Relationship: Inflation has important effect on debtor-

creditor relationship. Debtors tend to gain since the purchasing power of the money

repaid at the end of the loan is less than the purchasing power of the money borrowed.

This may encourage spending rather than lending and hence reduce funds available for

investment it may lead to higher interest rate as creditors demand some additional return

as a compensation for the falling value of money.

II. Effect on Balance of Payments: In developing economics that are dependent upon a

high level of exports and imports, inflation usually leads to balance of payments

difficulties. If other counties are not experiencing inflation to the same extent, the rise in

the domestic price level will make exports less competitive and imports more

competitive. This process if not check may lead to a deficit on the current account of the

balance of payments. This problem is particularly acute during a Demand- pull type of

inflation. Other Significance effects of inflation includes:

a) Effects on trade.

b) Effects on wage Earners.

c) Effects on Equity holders.

d) Effects on Businessmen.

e) Effects on Agricultural workers.

f) Effects on Production.

g) Effects on Government.

h) Effects on inflation or Deflation.

Opposition to deflation tends to be greater than that to inflation. Inflation may mean rising prices

but most people have at least the appearance of comfort in the form of rising money incomes

even though these incomes do not represent increased purchasing power. With deflation people

only see the idle factories and shops and the dole queues and that makes deflation a more

unpleasant alternation.

Deflation

According to Rockery (1993), deflation shows the same spiraling effects as inflation. Lower

prices will mean lower factor incomes and a fall in expenditure because the incomes out of

which expenditures come have been reduced. The main difficulty which a government faces in

trying to dear with an inflationary Situation is that if it reacts too violently it runs the risk of

leaching the economy from inflation to deflation, which would merely mean a jump from the

frying pan into the fire. In pre-war years Britain, in common with the rest of the unemployment

made people fearful even of the sound of the word. The measures taken in post-war years to deal

with the effects of inflation have therefore been referred to as measurers of distribution

indicating that their main purpose was to cut down expenditure, but not to such an extent as to

lead deflation.

2.3.2 Effect of Deflation

Rockery (1993:64) cited the following effects of inflation. They are.

a. Restriction of Production

Production becomes less profitable as prices will fall short of costs of production already

incurred.

b. Redistribution of the National Income

This will be in the reverse direction of that described for inflation. The gainers will be the

recipients of fixed incomes and the losers will be producers, the traders, and the workers,

and latter suffering mainly through loss of employment.

c. Increased Saving

Savers and lenders will gain at the expense of borrowers, though some of these gains may

be spurious as many borrowers may be driven to bankruptcy. Because in every country

there are more borrowers than lenders and because also the government is the largest

borrower of all, public.

2.3.3 General Effects

Inflation and deflation, in economics, are terms used to describe, respectively, a decline or an

increase in the value of money, in relation to the goods and services it will buy. Inflation is the

pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of

various goods and services. Repetitive price increases erode the purchasing power of money and

other financial assets with fixed values, creating serious economic distortions and uncertainty.

Inflation results when actual economic pressures and anticipation of future developments cause

the demand for goods and services to exceed the supply available at existing prices or when

available output is restricted by faltering productivity and marketplace constraints. Sustained

price increases were historically directly linked to wars, poor harvests, political upheavals, or

other unique events.

Deflation involves a sustained decline in the aggregate level of prices, such as occurred during

the Great Depression of the 1930s; it is usually associated with a prolonged erosion of economic

activity and high unemployment. Widespread price declines have become rare, however, and

inflation is now the dominant variable affecting public and private economic planning.

The specific effects of inflation and deflation are mixed and fluctuate over time. Deflation is

typically caused by depressed economic output and unemployment. Lower prices may eventually

encourage improvements in consumption, investment, and foreign trade, but only if the

fundamental causes of the original deterioration are corrected. Inflation initially increases

business profits, as wages and other costs lag behind price increases, leading to more capital

investment and payments of dividends and interest. Personal spending may increase because of

"buy now, it will cost more later" attitudes; potential real estate price appreciation may attract

buyers. Domestic inflation may temporarily improve the balance of trade if the same volume of

exports can be sold at higher prices. Government spending rises because many programs are

explicitly, or informally, indexed to inflation rates to preserve the real value of government

services and transfers of income. Officials may also anticipate paying larger budgets with tax

revenues from inflated incomes.

Despite these temporary gains, however, inflation eventually disrupts normal economic

activities, particularly if the pace fluctuates. Interest rates typically include the anticipated pace

of inflation that increases business costs, discourages consumer spending, and depresses the

value of stocks and bonds. Higher mortgage interest rates and rapidly escalating prices for homes

discourage housing construction. Inflation erodes the real purchasing power of current incomes

and accumulated financial assets, resulting in reduced consumption, particularly if consumers are

unable, or unwilling, to draw on their savings and increase personal debts. Business investment

suffers as overall economic activity declines, and profits are restricted as employees demand

immediate relief from chronic inflation through automatic cost-of-living escalator clauses. Most

raw materials and operating costs respond quickly to inflationary signals. Higher export prices

eventually restrict foreign sales, creating deficits in trade and services and international currency-

exchange problems. Inflation is a major element in the prevailing pattern of booms and

recessions that cause unwanted price and employment distortions and widespread economic

uncertainty (Miller and Benjamin, 2004).

The impact of inflation on individuals depends on many variables. People with relatively fixed

incomes, particularly those in low-income groups, suffer during accelerating inflation, while

those with flexible bargaining power may keep pace with or even benefit from inflation. Those

dependent on assets with fixed nominal values, such as savings accounts, pensions, insurance

policies, and long-term debt instruments, suffer erosion of real wealth; other assets with flexible

values, such as real estate, art, raw materials, and durable goods, may keep pace with or exceed

the average inflation rate. Workers in the private sector strive for cost-of-living adjustments in

wage contracts. Borrowers usually benefit while lenders suffer, because mortgage, personal,

business, and government loans are paid with money that loses purchasing power over time and

interest rates tend to lag behind the average rate of price increases. A pervasive "inflationary

psychology" eventually dominates private and public economic decisions

(http://www.uefap.com/vocab/exercise/awl/inflat.htm).

If the economy is dealing with deflation the only thing that is worth investing in is bonds because

they are considered a low risk. Also the reason investing in treasury bonds when deflation is

occurring is because the treasury bonds are not affected by deflation like stocks and other

investments are. Since they are not affected by deflation they are not considered risky

investments during a time of deflation. The main reason that bonds are not affected by deflation

is because treasury bonds and other bonds have fixed interest payments each year. This makes

them a great investment risk during deflation because during deflation interest rates are being

pushed down, but investor interest rate is guaranteed, so investors payments are worth more

during a period of deflation than inflation. If organizations are only considering investing in

stocks then they are a great risk to take during a period of inflation. The reason for this is that the

price you pay for stocks is not going to be affected by a period of inflation. The main reason

behind this theory is that in most cases a business's revenue and earnings are going to increase at

the same rate as inflation, so things are going to stay pretty much the same. The biggest risk

taken when investing in stocks during a period of inflation is that inflation can cause a company's

returns to be overstated because of the technique that is used to value the company's inventory. If

the return is overstated, that can be harmful to people who are investing in the business because

the numbers are not accurate.

When it comes to inflation it is going to affect investments in one way or another, but how it is

going to affect your investments is going to depend on what type of investments people have.

The reason for this is that stocks are going to be affected by inflation and deflation because of

interest rates and prices, real estate will be affected by these periods because of the interest rates

going up and down. The good news is that not all investments are going to be affected by

inflation or deflation, so when investing it is important to spread out the risk so that the investors

do not suffer a large loss if things go wrong. Bonds are the best example of investments that are

not affected by inflation or deflation because of their fixed interest rates. Deflation can affect

most of investments because deflation is going to push down the interest rate and when the

interest rates go down, so does the value of the dollar. Deflation will affect any stocks or

payments you receive from dividends because it causes investors to accept a lower payment

amount because of the lower interest rate. In other types of investments, such as real estate,

deflation can be a positive influence. The reason for this is that when interest rates are low in real

estate more people are likely to buy property, which makes it an easier investment to afford

(http://www.businessknowledgesource.com/investing).

2.4 IMPACT OF INTEREST RATES ON INFLATION:

Changes in Federal interest rates influences interest rates charged for overdrafts, mortgages,

loans and savings accounts. This change then affects the price of financial assets such as bonds

and shares as well as the exchange rate of the currency. This in turn affects the consumer and

business demand and thereby the output. Inflation has a significant impact on the time value of

money (TVM). Changes in the inflation rate (whether anticipated or actual) result in changes in

the rates of interest. Banks and companies anticipate the erosion of the value of money due to

inflation over the term of the debt instruments they offer. To compensate for this loss, they

increase the interest rates. This then impacts the employment levels and wage costs - which

finally influence producer and consumer prices and thus the Consumer Price Index and

Purchasing Power Index. Contributors:

1. A change in interest rates changes the cost of borrowing and thereby affects spending

decisions. Interest rates impact the attractiveness of spending today versus spending

tomorrow, as mentioned earlier. An increase in interest rates makes saving more attractive

and borrowing less, which reduces spending, by both consumers and producers. Conversely,

a reduction in interest rates increases spending by both consumers and producers.

2. A change in interest rates impacts consumers’ and producers’ cash flow or the amount of cash

at hand. For savers, a rise in interest rates increases the money received from interest on their

saving. But it will also imply higher interest payments for those with loans as they end up

paying variable interest rates (as opposed to fixed rates which do not change). These

fluctuations in cash flow affect spending.

3. A change in interest rates affects the value of certain investments, such as homes and stocks.

Higher interest rate increases the return on savings, thereby encouraging people to invest less

in property and stocks. A fall in demand for these reduces their prices, thereby eroding the

wealth of investors. This, in turn, influences them to spend less.

4. A rise in interest rates in the Nigeria relative to other countries increases the amount of funds

flowing into the Nigeria, as investors are attracted to the returns on a higher dollar rate of

interest. This appreciates the exchange rate of the dollar against other currencies. In reality,

the exchange rate is set by expectations about future interest rates and any unexpected

changes in interest rates, as when investors expect interest rates to rise, they increase the

amount they invest in a currency before interest rates actually rise. An increase in the value

of the $ reduces the price of imports and, because many imported goods are included in the

CPI, this has a direct influence on inflation. Also, a stronger dollar reduces the global

demand for Nigeria goods and services. This reduces the exports which then reduces the

output, and shifts domestic spending to imported goods.

A change in interest rates takes around 2 years to have its full impact on inflation, as it takes time

for these changes to affect the interest payments made by consumers or producers. It takes even

longer before these changes lead to changes in spending, and longer still for this spending to

work its way all the way through the supply chain to the producers. Changes in production, in

turn, lead to changes in employment and wages, increasing the unemployment rates and

eventually changing the prices. It is impossible to predict with any certainty the exact size or

timing of these influences as the effects vary based on factors such as the stage of the economic

cycle. For example, the impact of higher consumer demand on inflation just after a recession is

quite different than that after several years of expansion and boom.

A change in interest rates has an instant impact on consumers’ confidence, which influences

spending immediately. To be practical, these interest rate changes take much longer to actually

influence consumers’ and producers’ behavior, decisions and psyche. However, it provides a

great platform and framework for the sea change. Net-net, interest rates should track and pivot

on the inflation targets for the future years, and not on current targets. They have to be forward

looking and proactive versus stagnant and reactive

(http://www.investopedia.com/university/inflation/inflation3.asp).

2.4.1 Stabilization Measures

Sizer (2000) maintains that it is frequently suggested that chief remedy for inflation is an

increase in production. This is not entirely true. Every thing depends on whether the increased

Production can be obtained without the generation of addition incomes. If higher production

means higher incomes as well, then while there are more goods to be bought there is also more

income to buy them with and the position is not improved. What we really want is increased

productivity, which means that more is produced at a falling cost of per unit. This can be

achieved not only by harder work (which is in any case difficult to achieve in many occupations)

but also by better organization of the productive efforts and particularly by the use of more

roundabout methods of production, i.e. the employment of more capital in connection with a

given quantity of Labour.

Jones (1970:45) stated the effect of inflation as follows:

a) Rapid Increase in Production

Production will be more profitable at a time of rising prices since the prices of finished

goods rise faster than the cost of production. Thus a producer cannot help making a profit.

The prices of customer goods will generally rise faster than the price of capital goods, with

the effects that economy will concentrate on the making of more consumer goods. In the

long run this policy may be fatal to the economy as the existing capital goods tends to wear

out and the productive efficiency of the economy is sound to suffer if it is compelled to

work with ancient equipment.

b) Redistribution of the National Income

The classes of the community who are likely to gain by inflation are those who are able to adjust

their incomes quickly to rising prices so that their income will have an undiminished purchasing

power.

These sections include producers, traders and also manual workers whose unions are generally

able to secure for their members frequent adjustments of their wages. On the other hand, Salary

earners who are Salaries are fixed for longer periods of time, pensioners, and generally all

recipients of fixed incomes such as landowners and renters, will tend to loss.

c) Decreases in Saving

A period of inflation represents a serious disincentive to save. Once the general public has

become used to the idea of rising of rising prices they will not be prepared to save, as the

purchasing power of their savings is bound to decline. In a period of inflation, borrowers benefits

at the expense of lenders.

d) Injury To The Countries International and Economic Position

Rising prices at home will lead to a fall in exports and to an increase in import because the

country whose currency has been inflated is a good country to sell to and a bad country to buy

from. This will lead to a worsening of the country’s balance of payments, a loss of its

international reserves or a fall in the international value of its currency.

Any serious anti-inflation effort will be difficult, risky, and prolonged because restraint tends to

reduce real output and employment before benefits become apparent, whereas fiscal and

monetary stimulus typically increases economic activity before prices accelerate. This pattern of

economic and political risks and incentives explains the dominance of expansion policies.

Stabilization efforts try to offset the distorting effects of inflation and deflation by restoring

normal economic activity. To be effective, such initiatives must be sustained rather than merely

occasional fine-tuning actions that often exaggerate existing cyclical changes. The fundamental

requirement is stable expansion of money and credit commensurate with real growth and

financial market needs. Over extended periods the Federal Reserve System can influence the

availability and cost of money and credit by controlling the financial reserves that are required

and by other regulatory procedures. Monetary restraint during cyclical expansions reduces

inflation pressures; an accommodative policy during cyclical recessions helps finance recovery.

Monetary officials, however, cannot unilaterally create economic stability if private consumption

and investment cause inflation or deflation pressures or if other public policies are contradictory.

Government spending and tax policies must be consistent with monetary actions so as to achieve

stability and prevent exaggerated swings in economic policies.

Since the mid-1960s the rapid growth of federal budget spending plus even greater percentage

increases in off-budget outlays and a multitude of federal lending programs have exceeded the

tax revenues almost every year, creating large government deficit borrowing requirements.

Pressures to provide money and credit required for private consumption and investment and for

financing the chronic budget deficits and government loan programs have led to a rapid

expansion of the money supply with resulting inflation problems. Effective stabilization efforts

will require a better balance and a more sustained application of both monetary and fiscal

policies.

Important supply-side actions are also required to fight inflation and avoid the economic

stagnation effects of deflation. Among the initiatives that have been recommended are the

reversal of the serious deterioration of national productivity by increasing incentives for savings

and investment; enlarged spending for the development and application of technology;

improvement of management techniques and labour efficiency through education and training;

expanded efforts to conserve valuable raw materials and develop new sources; and reduction of

unnecessary government regulation.

Some analysts have recommended the use of various income policies to fight inflation. Such

policies range from mandatory government guidelines for wages, prices, rents, and interest rates,

through tax incentives and disincentives, to simple voluntary standards suggested by the

government. Advocates claim that government intervention would supplement basic monetary

and fiscal actions, but critics point to the ineffectiveness of past control programs in the United

States and other industrial nations and also question the desirability of increasing government

control over private economic decisions. Future stabilization policy initiatives will likely

concentrate on coordinating monetary and fiscal policies and increasing supply-side efforts to

restore productivity and develop new technology.

Government fights inflation by controlling the economic growth through the monetary policy,

which is simply the management of the money supply by the banks. Monetary policy aims to

influence the overall level of monetary demand in the economy so that it grows broadly in line

with the economy’s ability to produce goods and services.

Raising and lowering interest rates is the most common mechanism for implementing monetary

policy. Interest rates are increased to moderate demand and inflation and they are reduced to

stimulate demand. If rates are set too low, this may encourage the build-up of inflationary

pressure; if they are set too high, demand will be lower than necessary to control inflation.

1. Raising short-term rates has the exact opposite effect as it discourages borrowing, thereby

decreasing the money supply. This dampens the economy but in turn controls inflation.

Whereas decreasing short-term rates encourages smaller banks to borrow more from the Feds

and from each other, thereby increasing the money supply within the economy. Banks, in turn,

give out more loans to producers and consumers, which stimulate spending and overall

economic activity.

2. Feds can tighten or relax banks’ reserve requirements requiring banks to always hold a % of

their deposits with the Feds as cash on hand. This raising of the reserve requirements restricts

banks’ lending capacity, thereby slowing the economy. Easing reserve requirements, on the

other hand, stimulates economic activity.

Sometimes Feds fight inflation through fiscal policy- this includes raising taxes or reducing

federal spending, thus dampening the economic activity. Conversely, deflation is addressed

through tax cuts and increased spending to stimulate economic activity.

2.5 MANAGEMENT AND CONTROL OF INFLATION IN NIGERIA

The presence of inflation in the economy is difficult to detect especially at the incubation period.

This makes its management and control very difficult. Since there are numerous causes of

inflation, the panaceas do not lie in one probable solution. Thus attempt to apply the wrong

therapy to root cause may rallies to enormous problems than was set to solve. In Nigeria, two

main control measures are constantly in use to control inflation. These are fiscal measures and

monetary policy.

2.5.1 Money Policy

One of the objectives of monetary policy is the maintenance of confidence in the Nigeria

currency through measures to stabilize domestic rise in prices. Under the monetary policy, the

Central Bank controls the commercial banks through:

1) Prescribing minimum ratios of loans advances and discounts which each commercial

bank shall grant to indigenous

2) Borrowers.

3) Prescribing from time to time the cash reserve deposit ratio, which banks should maintain

with the central bank.

4) Call for special deposits from commercial banks.

5) Impose credit ceilings on commercial banks.

6) Vary the composition of special liquid assets of commercial bank.

7) Approve commercial bank loans to certain sizes.

8) Issue, allocate to and repurchase from finance institutions stabilization securities.

These monetary measures are heavily applied on the commercial banks because of the power of

the banks to create money. Another monetary policy adopted by the government is the open

market operation (OMO). When government notices that there is a large volume of currency in

circulation it issues out treasury bills and or treasury certificates to the public and financial

institutions. By enquiring these financial assets, the purchaser pays money, which reduces the

amount of currency in circulation. In this way, price increases is checked. Conversely when there

is less money in circulation, the government buys back these financial assets and increases the

currency in circulation. Open market operation serves to achiever three purposes.

a) To influence interest rate (that is, the price of securities)

b) To change the cash reserve of commercial banks and hence their ability to grant credit

and

c) To directly affect the money supply as it affords the public, the alternative of holding

cash balance or the securities involved.

Studies have all shown that nominal yield on stock on listed stocks are negatively related to both

anticipated and unanticipated inflation. Thus the effects of inflation are not uniform across all

common stocks. However this risk appears to reflect the greater risk being assumed by investors

because common stock is an inferior hedge against unanticipated inflation (Khourg 1983).

The effect of inflation on common stock prices is seen through its effect on the balance sheets

and the income statements of the firms. Inflation distorts the “true” earnings of the firm when

earnings are calculated in accordance with generally accepted accounting principles. Reported

profits are based on historical data.

The earning yield on the common stock market and long-term bond rates move generally

together, although the earning yield is more subject to change with the economic environment.

That is, it rises in recessionary times and falls during economic recoveries. Otherwise, the

earning yield and the bond rate move very much with the inflation rate - earnings yield being

relatively more negatively affected by rising inflation. In addition, the relationship between the

earning yield of the market and long term bond yield measures the relative willingness of

investors to reinvest the cash flow from their investment versus having the companies reinvest it

through retained earnings at the company’s return on equity rate, Finally, the earnings yield and

bond yield should provide a real rate of return to investors or the yield should be higher than he

inflation rate.

2.5.2 Determinants of Inflation

A widely dispersed price increase as it is, inflation is the immediate result of firms' decisions.

These decisions may result from coordination and monopoly/oligopoly dynamics, as well as

from the attempt to increase margins and profits. But there is no need for formal coordination:

a favourable demand situation, with higher income and booming propensity to consumption,

makes price increase easier. A generalized cost increase, as with wages, energy prices

(especially oil prices),devaluation, and certain taxes, is clearly conducive to inflation.

Mediation is given by productivity improvements, which reduce unitary costs of production.

Conversely, extensive liberalizations in sectors where prices were rising can lead to a lower

inflation rate, thanks to the new entrants and the tougher competition. Large increases

in money quantity, especially if clearly exceeding nominal GDP growth, risk accelerate the

current inflation rate. In other words, if present inflation plus real GDP growth is (much) less

than money-quantity rate of growth, there is a consistent risk of acceleration, unless other factors

push in the opposite direction.

A pro-inflation pressure may come also from fiscal deficit, with different dynamics depending on

ways of financing it (bonds sold to the market or to the central bank, i.e. with a sharp increase of

money quantity). An important determinant of inflation is given by expectations on future rate of

inflation, to the extent they are widely accepted and exert influence on decision-making

processes, as with long and medium-term wage contracts. Oil price fluctuations exert a

distinctive important influence on inflation throughout the world. The increase abroad of prices

for products that our country purchase, if not counteracted by a re-valuation of the currency,

exerts a pressure on the price level, possibly inducing "imported inflation". Inflation in the

country's trade partners then spread out and can feedback there.

Another sector where there are wide fluctuations is agriculture: food prices are volatile,

especially when a number of real world events are amplified by speculation. A relatively similar

phenomenon relates to raw materials and industry inputs such as minerals. The attempt by

statistical offices to ignore price movements in volatile sectors generates the computation of

"core inflation". By contrast "headline" inflation is what the media report more often (being

easier to communicate) and tend to influence the perception of inflation by the (media-exposed)

population.

2.5.3 Impact of Inflation on Investment

Inflation also muddies inventory planning, as can be gathered from the references to LIFO-FIFO

accounting methods. Ideally, the inventory-sales ratio should be kept as low as feasible so as to

minimize the cost of storage and the cost of money tied up in inventory. But inflation creates all

manner of uncertainties because of rising prices in raw materials, semi-finished and finished

goods. As these prices rise, purchasing managers naturally undergo temptations to "beat the gun"

by accelerating their forward buying. The purchasing manager of course realizes that his cost of

storage and tied-up money will thereby go up. But they may hold that these costs are more than

offset by being able to obtain inventory at lower prices than he could later. Too, with a surge of

buying he may also begin to worry about availability and delivery delays. So, this inadvertently

adds to speculative activity and puts pressure on prices, as it accelerates forward buying. With all

this, however, his inventory-sales ratio may not advance if other purchasing managers adopt the

same hedging behavior and also increase their forward buying; the result is that as his inventory

climbs, so do his sales. This would be especially true if the purchasing manager is in a basic

materials industry. But such inventory build-up behavior, stimulated by surging demand, tends to

be short-lived.

For on this score alone, inflation may be contributing to a key factor in the business cycle

inventory buildups, which can lead to a boom, and inventory liquidations, which can lead to a

bust. Ironically, the liquidations in effect contribute to deflationary pressures on the very price-

inflated commodities and goods that brought on the inventory build-up in the first place.

In like manner, inflation disrupts capital planning. Business may be good and the backlog long,

but the long-run outlook remains unclear. The planning manager is thus put in the same quandary

as the purchasing manager. On the one hand, investor does not want to tie up his financial

resources in the fixed costs of under-utilized plant and equipment and incur the burden of

unnecessary overhead. On the other hand, he is lured by the possibility of obtaining capacity at a

significantly lower cost than he could in later stages of inflation; and, he hopes, maybe his order

backlog would not evaporate. This quandary is especially visible in the basic materials industries

such as energy, metals, paper, chemicals, and so on. These industries are extremely capital-

intensive. Moreover, because these industries lend themselves to significant economies of scale

and require long lead times for new facility construction, new capacity demands tend to come in

lumps rather than in evenly spaced-out requirements.

The process is exacerbated by inflation and the business cycle which give wider swings and a

feast-famine aspect to the capital goods industry. This aspect is inherent in the capital goods

industry anyway, as the accelerator theory of J. M. Clark demonstrates. This theory says that a

change in demand for consumer goods tends to have an accelerated change in the demand for

capital goods, assuming that the economy is operating at full capacity. Inflation accentuates the

problem of the accelerator by giving exaggerated indications of consumer and capital goods

demand.

Inflation and the business cycle itself seem to be initiated by credit expansion and artificially low

interest rates, both aided and abetted by the central bank. The low interest rates give businessmen

false signals of genuine capital availability made possible by savings when the fact of the matter

is usually a central bank speedup of money supply growth. The speedup provides the familiar

scenario of too much money chasing too few goods, winding up in "stagflation” a combination

of inflation, extremely high interest rates and economic stagnation. The scenario comes at a bad

time. Capital formation has lagged for a long time in America. The American economy must

modernize and expand its plant and equipment to accommodate its growing labor force, to reach

its energy and ecological goals and to compete in an increasingly competitive one-world

economy.

One impact of inflation is political a tendency for governments to react to inflation with wage

and price controls. The irony of such government reaction is twofold: First, government itself is

overwhelmingly responsible for the inflation it seeks to correct; and second, wage and price

controls treat symptoms, not causes; they repress inflation, mask it, causing shortages and

distortions while allowing inflationary forces to become even more virulent. Corporate managers

in this period generally experienced a cost-price squeeze. In other words, they found their prices

lagging behind their costs, chiefly labor and interest costs. In such a squeeze, many of them fled

the regulated domestic market and shipped to unregulated markets abroad. This situation merely

worsened the distortions in relative prices and the shortages endemic to the entire wage-price

control era. Besides shortages, corporate managers had to contend with rampant demand,

shipment delays, quality lapses, multiplying bureaucratic interferences and, ultimately,

breakdown of the controls themselves. This breakdown in turn led to a rash of "catch-up" wage

and price increases, which haunt us down to this very hour.

The controls led not only to a profit squeeze, but to a capital investment squeeze. Many basic

materials industries, for example, knew that they had exhausted their capacity limits and that

their backlogs could be measured not in months but in years. Yet they still could not set aside

expansion funds by the retained earnings route, with earnings so squeezed; they could not raise

equity funds with their stock prices so depressed; and they could not go to the bond market, with

inflated interest rates reaching double-digit levels. The upshot was that supply became tighter

and tighter across the country.

2.6 RELATIONSHIP BETWEEN INFLATION AND PROFIT (PRODUCTIVITY)

Rational decisions by businessmen about production, investment, borrowing, cash management,

wage settlements, and international trade all require the use of information from the price system

to make longer term decisions. It is easier to detect emerging changes in relative prices on both

input and output prices when the general price level is stable than when all prices are going up.

Furthermore, a high average rate of inflation normally involves greater variations in individual

price changes. In this sense we can say that inflation affects profitability in four ways. It changes

the cost of funds used to finance an enterprise; it increases costs of labour, materials and the

price of the product; it affects the tax bill to be paid; it causes shifts in demand patterns.

Most companies make forecasts of the number of units of output they will produce and sell the

man-hours and machine-hours that production will require and the volume of material purchases.

These forecasts in terms of physical units can be converted to cash flows by multiplying by the

appropriate prices. In situation of the cost of funds to a company is related to the level of interest

rates. Because business enterprise is risky, the overall cost of funds is higher than the interest

rate, but will rise and fall as the interest rate changes.

Overall cost of funds = Interest rate + Risk premium

The interest rate reflects expectations of inflation. The proposition that the interest rate

completely reflects the expected inflation rate is known as the Fisher effect. In a normal times;

interest rate equal to expected inflation rate. This relationship between expected inflation and the

cost of funds is useful in two ways if we wish to forecast inflation, one of the best places to start

is by looking at interest rates. Second, if you choose to make financial decisions by forecasting

real cash flows and discounting at a real rate, the Fisher effect tells us roughly what real rate we

should be using. It should be the real interest rate of approximately zero plus a risk premium of

approximately 6 per cent for the average risk company ( Ian Cooper, 2003).

Higher rates of inflation in goods prices eventually end up in higher interest rates normally.

There are also larger differences in the rates of price changes internationally, and the differential

experiences in prices and interest rates among countries are reflected in exchange rate changes.

Market prices become less effective in decision making and in the coordination of economic

activity during inflation, so senior business leaders spend more time trying to find out what is

going on in the economy with increased environmental uncertainty and thus have less time to

manage and coordinate internal decision making within their organizations effectively. This

assertion and relationship can be visualized in the financial records of First bank Nigeria plc on

the movement of profit from 2007-2011 reciprocate to the inflationary trend of the economy (

see the appendix).

Peter Clark has published a recent study on inflation and the productivity decline in the United

States. He finds a close connection between the deviations in the levels of prices and the levels of

productivity from their longer term trends and presents some evidence that the causal direction is

from high price level deviations to low productivity level deviations Clark (1982). A duplication

of his methods for Canada yielded very similar results.

A study on the interrelations between inflation and productivity in Canada concluded that "the

increased inflation rates of the 1970s are sufficient to explain virtually the entire recent

slowdown in productivity growth" [Jarrett and Selody (1982). A study on Japan also shows

similar negative effects of inflation on productivity and economic growth [Oritoni (1981). It may

be significant that the rate of economic growth in Japan has continued higher than in the other

industrialized countries since the inflation of the early part of the 1970s has been controlled.

A number of studies of periods of hyperinflationary episodes indicate that such periods lead to

sharp drops in productivity as individuals and businesses revert to barter types of trade with the

collapse in the use of money for transactions purposes.

Earlier studies of productivity over business cycles have established that productivity increases

slow down in the early stages of recession in demand, and can even become negative in more

severe recessions. This theme was an integral part of theory of business cycles, and the empirical

evidence was studied by Thor Hultgren (1965). Okun emphasized the degree to which changes in

the unemployment rate and the related fluctuations in actual output relative to potential output

were related to variations in productivity [Okun, 1970). A number of studies of economic growth

and its shorter-term variation have quantified the effects of shorter term demand fluctuations

[Denison, 1979). These cyclical variations in prices, costs, productivity and profits are an

important and integral part of business cycles and these timing interrelations have persisted for

decades [Moore, 1980).

The increased importance of inflation and studies of its effect on productivity suggest that steady

non-inflationary growth in demand would be favorable to high productivity growth over

extended periods while either weakening in demand or inflationary pressures of demand would

have adverse effects on productivity growth. The only result consistent with Benabou (1988) and

Diamond (1988) is that the coefficient on inflation for quarterly data is negative. However,

neither annual nor quarterly data shows that inflation has a significant effect on industry

contribution margins. Benabou (1992b) predicts profit margins will increase or decrease with

inflation dependent upon buyer search cost. Benabou (1992b) predicts profit margins will

increase or decrease with inflation dependent upon buyer search cost. Tommasi (1994) show that

inflation lowers the informativeness of current prices about future prices which translates into

higher consumer reservation prices. Less well informed consumers permit firms to raise their

markups resulting in increased price dispersion. The industry annual and quarterly data both have

the expected signs on inflation and the product of inflation and search cost. The size of the effect

of inflation on an industry’s contribution margin does indeed depend on buyer search cost. Seller

(industry) contribution margins are relatively higher in an inflationary environment if the seller’s

associated buyer’s search cost is relatively high.

Dramatic results are obtained with three major corrections:

1. Under depreciation of plant and equipment, due to depreciation allowances based on original

cost rather than replacement cost. This practice has long led to a general overstatement of

corporate profits, with consequent overpayment of corporate income taxes and even

overpayment of dividends. These result in diminution of potential capital formation. Tax

authorities have recognized this problem and have dealt with it to some extent by setting up

investment tax credits and accelerated depreciation methods. Financial managers have taken

advantage of these provisions to varying degrees. Yet these provisions have proven to be

inadequate in view of our two-digit inflation. Both tax authorities and financial managers

would be well advised to recognize this depreciation deficiency and the drag it imposes on

economic growth — on the economy as a whole and on each individual enterprise. The

average age of American plant and equipment continues to lag behind that of our major

industrial competitors overseas, and behind what is needed to meet the expectations of our

growing population

2. Allowance for the inflation that has diminished the profit naira. Inflation has eroded the

purchasing power of the dollar by more than 40 per cent since 1965. So on this count alone,

and despite more than a trillion dollars (in today’s prices) poured into plant and equipment,

corporate profits have shown but minor increases since 1965 in real terms. For as sensible is

the conversion of money wages into real wages, so financial managers can sensibly convert

money profits into real profits. To be sure, second quarter results in 1974 were about 25 per

cent ahead of those of the second quarter of 1973. But price controls came off completely

April 30, 1974, allowing many firms to catch up with true supply and demand. Moreover, if

the spectacular gains of some basic materials industries are excluded, along with the atypical

profits of the auto industry, the bulk of industrial companies made only a moderate increase

of 10 to 11 per cent in the first half of 1974 just about equal to the rate of inflation.

In any event, corporate financial and public relations managers may want to deflate their profit

figures and remind the public of the corporate return in real terms. Yet these managers are

frequently reluctant to do so, beholden as they are to shareholders and given to pointing with

pride to "record" profits. The economy therefore suffers because of management’s desire to show

good earnings during an inflationary era.

3. Overstatement of profits because of the understatement of inventory values. Some authorities

call inventory gains "phantom profits," which disappear the moment inventory is replaced. To

put their own corporate profits in a truer light, quite a few financial managers are switching

from first-in, first-out (FIFO) to last-in, first-out (LIFO) for more accurate inventory

valuation. It’s about time. In an editorial on 1974, the Wall Street Journal criticized those

financial managers who got caught up in the earnings-per-share mystique and used FIFO to

that end. With rising inventory prices, FIFO permitted higher reported earnings all right, but it

also permitted in fact, required higher taxes on those earnings. Indeed, FIFO thereby fostered

less capital to invest for long run returns. Capital markets don’t ignore such unrealistic

accounting.

The portent for real capital investment and real economic growth in the immediate future is

hence not very great, mainly because of the disastrous inflation we have been incurring for the

past years.

According to wood et al (1975), inflation may occur in one or two possible forms; it may be

demand inflation or it may be cost inflation.

a) Demand Inflation: This takes place when, at a time of stable prices additional

expenditure is generated with the effect that given full employment, Prices of goods and

services rise. This will eventually lead to higher rewards for factors of production as well,

i.e. wages and profits will go up. The proper remedy appears to be some curtailment of

demand, either by higher interest rates or by a suitable taxation policy which will deprive

spenders of some of the income which they would have spent on the purchase of goods.

b) Cost Inflation: This Kind of inflation, on the other hand, originates in higher factors

prices, e.g. in wage awards which are not justified by increases in the productivity of

labour. Higher cost will then lead to higher prices of goods and services.

Whichever form inflation may take, however, it will have a snow balling effect, i.e. the

inflationary spiral will set to work. Higher prices will lead to demands by the factors of

production for higher rewards to maintain the real value of their incomes and these higher factors

rewards will mean higher costs of production and will thus lead to a further rise in prices. And so

it will go on. This is the main danger of inflation, once it has stared, it is difficult to put a stop to

it without being unfair to one particular section of the community, namely that section whose

incomes have not yet been adjusted the higher prices Prevailing all round.

2.6.1 Measurement of Inflation

Inflation in its simplest form has been described as a period of sustained rise in prices. In order to

determine this increase price, a mechanism for measurement and analysis of price movement is

very necessary. However, in Nigeria due to poor system of data collection, analysis, storage and

reliability, the price level and hence the inflation figures published can best be described as

conceptual.

The rate of inflation is stated as percentage increase in prices of any given data as compared to

the same data of previous year.

Three main types of price indices are often used to describe inflationary tendencies in an

economy (Case and Fair 1994:198). These indices are:

1. Consumer price index (CPI),

2. Whole price index (WPI) and

3. Implicit price index (IPl) or the GDP deflector.

There is always the problem as to which method provides the best statistical approach towards

the measurement of inflation. Conceptually, the IPI or the GDP deflector provides the best

measure of price inflation because it is the only index, which attempts to measure the overall

price behaviour of goods and services in the country. Specially, the index measures price

behaviour of the gross domestic products. Griffiths (1977), agree that the GDP implicit deflector

is a measure of the price level of all final goods and services, which enter the GNP including

those of government sector. Because of this, its coverage is much greater than either of the other

indices. The index is in fact the ratio between the current money value of GNP and current real

value of GDP. Mathematically, this is expressed as the ratio between GDP at current price and

GDP at constant prices multiplied by 100.

This method however, has been criticized as being too broad for any meaningful practical

purpose. The WPI is mainly concerned with prices of raw materials, intermediate materials,

producers finished goods and consumer finished goods, which are sold to producers. Since it

covers prices at different stages of production, it permits the tracing of price rise through

successive stages from raw materials to finished goods.

The most commonly way to measure the overall price level is the Consumer price index,

popularly known as the CPI (Samuelson and Nordhaus 1985). From the standpoint of consumer

welfare, the index is the most useful because it provides some indications as to the extent to

which consumers are being affected by price changes thereby committing the measurement of

the changes in the real income to consumers. However, due to the difficulties that becloud the

CPI stem from considerable amount of time and expense required, the system has come under

great criticisms. To compensate for this shortcoming it is now a practice to use a fixed set of

weights for a period extending up to 10 years.

Shows the consumer price index in Nigeria

Years

Composite Consumer price index

1985

98.0

1986

111.4

1987

122.2

1988 197.0

1989 285.0

1990

295.3

1991

363.1

1992

540.3

1993

871.3

1994

1540.1

1995

2334.6

1997

2941.4

1998

3291.8

1999 3299.2

2000

3778.4

2001

4401.7

2002 4937.3

2003 6112.9

2004 6729.3

2005 7927.1

Source: 1 Central Bank of Nigeria Statistical Bulletin,

2 Central Bank of Nigeria Annual Report and

Statement of

3 Accounts for the year ended 31st December

2004 and 2005.

In the light of the above and coupled with the fact that CPI record price changes as it affect

households and that it is these households that pull resources for investment. For this reason, the

CPI index will be used as the measure of the rate of inflation in this work.

2.6.2 Reasons for the Post-War Inflation

Sizer (1977) posted that the reasons for the inflation which affected Great Britain from 1945

until about 1956 may be briefly summarized as follows:

a. During the war people were compelled to save because there were no goods available on

which to spend their income. Thus most people built up cash balances which they wanted

to spend as soon as the war ended and rationing was relaxed

b. Cost of production after the war rose steeply mainly because of the increased bargaining

power of wage-earner resulting from the existence of full employment. Reconstruction

needs of all countries were such that there was a scramble for raw materials and for

essential equipment and the prices of these increased as well.

c. Peacetime military expenditure was not drastically reduced and in fact after the outbreak

of the Korean War military expenditure began to increase again thus adding to the

pressure of total expenditure on limited productive capacity.

d. The government decided to make Britain into a welfare state and this involved full

employment and an increased rate of the public expenditure

e. Certain forms of investment were unduly expanded because of the cheap money policy

(low interest rates) which was pursued by the labour government from 1945 to 1951. This

policy was mainly intended to assist local authorities with their large building

programmes and to the extent to which it succeeded in this objective it meant a further

strain to the national resources.

f. Inflation might possibly have been avoided or delayed if post-war government had been

willing to use the weapons of fiscal policy up to the hit. A rise in taxes after a long war

would have been too unpopular however and although taxes remainder at a very high

level for a long time they were not increased to the point where private expenditure

would have been curtained sufficiently to make up for the large volume of public

expenditure.

2.6.3 Inflation Since 1956

Egginton (1977) Observed that retail prices in the UK between 1956 and 1968 have risen on

average by 3% a year, while over the same period average weekly earning of manual worker

have gone up by about 5½% a year. Company profits tend to be somewhat erratic but since 1956

and especially since 1961 they have increased more slowly than employment incomes. The

government, recognizing the urgent need for a stable price level set up national Board for prices

and incomes in April1965. The Board investigated all questions of prices and incomes referred to

it by the government.

A white paper “productivity, price and incomes policy in 1968 and 1969” published in April

1968 emphasized the government firm intention to curb inflation by relating wage increase to

productivity. The government fixed a ceiling of 3½% on all wage and salary agreement reached

after 20th March 1968. Exceptions to this ceiling wage only to be considered where productivity

and efficiency were sufficient to justify an increase in fact, wages rose faster than the ceiling by

8% in the years April 1969-70.

It would appear from Britain experience and that of other countries that the successful operation

and enforcement of these types of artificial control over prices and incomes is certainly not

automatic. The prices and incomes Board was abolished in March 1971. Incomes policy is

discussed more fully in the next lecture.

Stagflation in the Early 1970

Gill (1973:313) argues that the term stagflation is used when inflation, unemployment are

stagnant or declining production and balance of payments deficits occur simultaneously. This

combination was unknown until the 1970s when Britain USA and other countries experienced it.

Stagflation is the result of cost inflation. Employers reduce employment and curtail production

and the government introduces anti-inflationary measures. If these fail, balance of payment

problems is likely. The government has to decide whether to continue disinflation or to inflate

the economy to reduce unemployment.

2.6.4 The Element of a General Theory of Price Level Analysis

By definition whatever approach to analysis of an inflationary situation one adopts, some

assumption has to be made as to what determines the price level at each point on time. It is

equally obvious that something has to be said about cost but less obvious why some authors

concern themselves with the demand for real cash balance. To provide some justification for this

concern, consider again the equation of Exchange MV=PY. Let us adopt a very Simple theory of

wage inflation, which states that prices are proportional to money wages and wages rise

cautiously at a constant percentage rate per annum. We assume that the nominal supply of money

M is fixed. By assumption prices will be rising at the same percentage rate as the wage unit, it

follow from the equation of Exchange that if real income is rising concomitantly with the rise in

the general price level, the income velocity of money is also rising, or to put it another way, the

ratio of real cash balances to real income is falling. Now to the cost of inflationist and indeed to

others, the decline in the ratio of real cash balances to real income may be of no concern at all.

For them, velocity may have no independent significance. Note the Elasticity of income velocity

in the absence of any apparent limit on its value permits a continual growth in the price level

without affecting the level of real income and employment. In this Situation the wage fixing and

price determining relationships alone are important from the point of view of general price level

analysis.

2.7 DECISION MAKING

Is defined as a process whereby, management when confronted by a problem to selects a specific

course of action from a set of possible courses of actions. According to (Vohra p²) Situations

under which decisions are made vary, and there various ways of classify them thus,

(1) Decisions under uncertainly: Here the event or state of nature that will occur is not

known for sure but probability estimated can be assigned to the possible outcomes and

decision, making under certainty where all facts are known. When a firm is trying to

decide the amount to invest in government Securities and the type of government

Security to invest in, it is a good example of decision, making under certainty. The rates

of interests here are fixed and government rarely defaults. On the other hand a decision to

invest in a machine that will be used in vending a new brand of ice cream is a decision

making under uncertainty because the relevant facts are not known.

(2) Static decision Situation and dynamic decision Situation: A Static decision is that

which is made once and for only one time period. A dynamic decision on the other hand

is a sequence of interrelated decision over several time periods.

(3) Decision can also be classified in terms of the nature of the opponent. The opponent

could be either nation or thinking opponent. For a firm that is prospecting for Tin, gold or

oil, the opponent is nature. The outcome will depend on whether nature has endowed the

area or land with which the firm is seeking for or not.

2.8 Theoretical Framework

2.8.1 Positivists theory

This theory accepts fundamentally that inflation has an impact on investment and that the impact

is positive. In other words, inflation tends to encourage investment. According to Griffiths

(1979), one of the major arguments, which have been used to justify the pursuit of inflation

policies by governments, is that inflation results in a more rapid economic growth. Furthermore,

he added that inflation tends to redistribute income from wages to profits, As the marginal

propensity to consume out of profit is allegedly much lower than that of wages, this leads to

forced savings in the economy as whole with a corresponding increase in investment and in the

rate of growth. Going by this argument, inflation also increases the level of saving by

maintaining Gross National Product (GNP) at its full capacity level.

Another point pursued by this school is that inflation increases investment because it reduces the

real rate of interest, which is relevant in investment decision. Rapid economic growth they

argued has taken place in countries with high rate of inflation. There is a widespread belief that

inflation and development are related. This relationship could be that economic development, is

a cause of inflation, or that inflation fosters economic development. Moderate rate of inflation

may be the accompaniment of an increase in the production of wealth. The government policy of

economic expansion by increasing the money supply almost inevitably leads to increase demand

and, where there are spare resources, an increase in production. Even if the expansion leads to

inflation, this may stimulate individuals to produce articles of real wealth instead of leaving their

resources in depreciating money. Thus economic activities and the standard of living have in

recent years risen appreciably in many parts of the world in greater competition for primary

products and a consequence of increases in world prices. In conclusion, it is the view of this

school that inflation is an inevitable ingredient if the economic growth and development are to be

achieved. In other words, inflation does not depress but encourages investment.

2.8.2 Negativist Theory

The negativist theory views inflation as contributing adversely to increase in investment. In their

view, the mention of inflation introduces a risk component which investors dread except there is

a commensurate rate of returns. Hagger (1977), believe that inflation reduces the value of money

and increases risk. This argument is correlated to the fact that inflation is a tax on money;

expenditure in the private sector of the economy is reduced because of such tax. This school has

the following, which made their views, echo prominently in many literatures.

The effect of inflation upon a business can briefly be described as distorting its profit

performance and valuations of its capital, which in turn affects the judgments and decisions of its

management and investors, Case and Fair (1993), asserts that when unanticipated inflation

occurs regularly, the degree of risk associated with investments in the economy. Increases in

uncertainty may make investors reluctant to invest in capital and to make long-term

commitments. He believes that the effect of raising capital makes new investment relatively

unattractive. They suggests that the fear of resurgent inflation and the public policies it might call

forth have clouded the outlook and contribution to the weakness in the investment climate.

Further, they stress that inflation exerts a negatives influence on other parameters of economic

activities, especially the growth of private investment. To achieve this aggregate effect on

investment, inflation impact on separate systems that make up investment.

2.8.3 Neutralists Theory

A probe into the neutralist analysis of investment and inflation shows that inflation has no visible

impact on investment, Inflation is a unambiously evil phenomenon, it is by no means obvious to

the economists that inflation is a bad thing. It has often been argued for example, that a price

level which is changing at a constant proportional rate and which is fully anticipated and acted

upon by all economic. Agents will have negligible effect upon economic welfare (Trevithick,

and Mulvey, 1975). There is no convincing evidence of any clear association, positive or

negative, between inflation and the rate of economic development and investment. They warned

that it is naïve to conclude that anyone is harmed by inflation. Until calculations are made, we

cannot be sure if inflation was helpful or harmful to a specific entity. As a result, the neutralists

concluded that investment is indifferent to inflation.

Taken together, the three schools seem to agree on one issue, that a little amount of price rise

(inflation) is necessary for economic growth, hence investment. But the major line of divide lies

in the agreement of a trade-off between desired level and the point at which inflation becomes

injurious. In broad terms, the findings of the studies carried out by staff members of all

International Monetary Fund (IMF) have been the same. Rapid economic growth has taken place

in countries with high rates of inflation, and in countries with low rates of inflation Griffiths

(1977).

A more recent study suggests that an inflation of between 3 and 10 percent tends to be a positive

encouragement to growth, while inflation of more than 10 percent tends to retard growth. The

mechanism by which this allegedly takes place is that such a moderate rate of inflation tends to

be a stimulus to savings and investment.

2.10 EMPIRICAL REVIEW

Extensive review both theoretical and empirical, examines the micro foundations of the links

between inflation and price dispersion. In contrast, little research has been done on how inflation

affects profit margins.

Sheshinski and Weiss (1977) study a monopolistic firm that faces a cost for adjusting its selling

price. The seller optimally follows an S,s pricing rule in an inflationary environment. He

maintained that a constant nominal price until inflation erodes his real price below s, and then he

will increase his nominal price to S. As inflation increases, S increases and s falls; thus the

magnitude of a price change increases.

Given monopolistic competition, Benabou (1988, 1992a) introduces the idea that the larger and

more frequent price adjustments of S,s pricing during inflation offers consumers a scope for

search. In equilibrium, consumer search is optimal given the price dispersion that results from

the staggering of S,s pricing rules. Welfare effects depend upon the size of consumer search

costs. Low search costs allow consumers to take advantage of price differences that lead to

increased competition and positive welfare effects. High search costs imply even greater

equilibrium prices and more price dispersion. The wasteful search costs and higher prices have

negative implications for welfare.

Diamond (1993) follows a similar strategy, but develops his model with “sticker” prices. Prices

are literally affixed to the good itself. The “sticker” can only be changed at some cost. Inflation

reduces the real price of a “stickered” product sitting in inventory. The presence of the older

priced goods lowers the reservation price of the consumers. Inflation actually reduces market

power because consumers search for goods with the old sticker price. There is price dispersion,

but less market power.

Only a few theoretical papers touch on the issue of how inflation affects profit levels. This work

follows Lucas (1973) and studies the impact of inflation uncertainty on price markups. Benabou

and Gertner (1993) introduce a stochastic shock on the costs of producers and examine the effect

of inflation uncertainty on price dispersion. In this model, consumers cannot distinguish between

aggregate and relative shocks. Consumers can decide to enhance their information with search

and must infer from prices whether it is worth the cost to search. Benabou and Gertner find

increased inflationary uncertainty has two effects on welfare. First, there is a correlation effect. If

seller prices are correlated, inflation makes consumers search less when they observe a high

price. However, consumers search more when they observe a low price because they believe

better prices may be available. Second, there is a variance effect, because buyers can return to

the first seller costlessly, an increase in inflation uncertainty increases the option value of search.

Increased inflation uncertainty promotes search and lowers the sellers’ market power. Benabou

and Gertner [1993] show that increases in inflationary uncertainty lead consumers to seek more

information. In equilibrium, consumers are better informed and prices adjust to the increase in

competition. The main result of Benabou and Gertner (1993) is that the effect of inflationary

uncertainty on market efficiency depends critically on the magnitude of buyer search cost. Low

search costs make it possible that the benefits from an increase in inflation uncertainty outweigh

the costs. Increased price competition may result in a benefit that is higher than the buyer’s

search cost. High search costs lead to the opposite result. An increase in inflationary noise allows

sellers to charge higher real prices as they take advantage of the consumers’ reduced

information. Thus, high buyer search costs imply higher firm profit margins and decreased

efficiency.

Van Hoomissen (1982) and Tommasi (1994) show that inflation lowers the informativeness of

current prices about future prices. Prices become outdated quickly, which leaves the consumer

less well informed. Tommasi shows that the lower information stock translates into higher

consumer reservation prices. Repeat purchase consumers thus have less incentive to acquire

price information. Less well informed consumers permit firms to raise their markups which

results in price dispersion.

The empirical literature on inflation and price dispersion generally supports the above theoretical

papers, but there are some exceptions. Weiss (1993) provides an excellent survey of empirical

findings from microeconomic data on the issue of inflation and price adjustment. Two empirical

regularities are generally recognized. First, nominal price changes occur in discrete jumps. This

is clearly consistent with S,s pricing theory. Second, as inflation increases, the variance of

relative prices (price dispersion) also increases. This supports all of the aforementioned

theoretical models.

Benabou interprets his findings as support for the prediction that S,s pricing theory under

inflation would lead to higher price dispersion. With low consumer search costs, price dispersion

promotes search and competition intensifies leading to a decrease in markups. Borenstein,

Cameron, and Gilbert (1997) document asymmetric gasoline price responses to crude oil price

changes and argue that the data is not inconsistent with the implications of the Benabou and

Gertner model. In gasoline markets, increases in inflation uncertainty do translate into higher

profit margins.

Sizer (2000) observes that the problem of inflation on reported profit stems from the way the

profits are measured by accountants. He posited that accountants measure profit by finding the

difference between the net assets at the beginning and end of the accounting period. They match

the actual revenues of the period with the actual expenses of the period, and to the extent that

revenue exceeds expenses, there is a profit. However under the historical cost accounting system,

the matching process may be of revenue of the period with cost of an earlier period, they do not

necessarily match current values. Further more the balance sheet is made up of a mixture of naira

of different periods, depending upon the mix of assets, the age structure of the assets and

depreciation policies. He concluded that an overstatement of profits and an understatement of

assets employed will occur in time of rising prices if any output costs of one date are matched

without output revenues of a later date, and if assets are shown in the balance sheet at their

historical cost this will arise in the case of:

3. Depreciation in the profit and loss account and fixed assets in the balance sheet

4. The charge for stocks and work –in- progress consumed in the profit and loss account

and stocks and work –in- progress in the balance sheet.

Lucey (2000) posits that if the assets are depreciated on the basis of historical cost and stocks and

work-in progress on a first-in-first-out (F.I.F.O) or similar basis, part of what accountants

calculate as profit will be required to maintain the capital of the business intact. Part of the profit

will be required to cover the increased cost of replacing fixed assets and stocks which were

bought or produced at prices considerably lower than those ruling as at the date of consumption.

If a company distributed as dividend the whole of its historical cost profit, it will have

insufficient cash left to maintain its present level of stocks and work –in progress and replace its

fixed assets

Wood and Townsely (1980) argue that if as a result of inflation profit is seriously overstated, the

burden of taxation on the business will be greater than that implied by the nominal rate of

taxation. If reported profit, which result merely from a change in the value of money, or capital

gains arising for the same reason, are taxed as if they are real income to the business, then the

ability of the company to maintain the capital of the business intact and sustain real growth will

be diminished furthermore, if historical cost profit are the basis for profit margin control under

price legislation, a company’s ability to generate adequate cash during a period of high rate of

inflation will be seriously impaired.

Maria (2014) study focused on investigating the collision of leverage, liquidity and inflation on

firm’s profitability of the food industries of Pakistan with the aim of ascertaining the effect of

leverage, inflation and also liquidity on dependent variable, i.e. firm’s earning (profitability).

Using a sample of the population of the foodstuff sector in Pakistan, the research come to the

conclusion that there's a solid bad negatively relating to the changing control leverage, liquidity,

inflation and also the firm’s earning(profitability). Liquidity ratios are insignificantly related with

return on asset and return on equity. Debt ratios are negatively associated with return on assets

and return on sales. Profitability ratios are positively associative with return on assets and return

on equity.

Earlier studies conducted have a mixed opinion on the effect of inflation on dividend payout.

Due to the nominal increase in the volumes of money, which result from the increase in inflation,

at least for a short run, some studies have concluded that inflation has a positive effect on

dividend payout. Ochieng and Kinyua (2013) studied the relationship between inflation and

dividend payout for Companies listed at the Nairobi Securities Exchange which considers a

sample of all the firms that consistently paid dividend between the year 2002 to 2011 and were

listed at the Nairobi Security Exchange showed that, inflation rate has no impact on the dividend

payout. The study reveals that, the exchange rate and the T-Bill rate have a positive correlation

with dividend payout, while volume of money supplied has no impact on the dividend payout.

Mohammed (2014) studied the asymmetric effect of inflation on dividend policy of Iran's stocks

market and surveys the asymmetric effect of inflation on dividend policy of Iran's stock market

since 2005. Reaction of dividend policy maker to hedge shares against double-digit inflation of

Iran depends on the company status in making a profit or loss. They used panel data approach to

test the non-symmetric effect of inflation on the companies' decision in decreasing, increasing

and maintaining of dividends. The results show that inflation has the positive effect on increasing

and maintained dividend decision of companies. But it has the inverse and negative effect on

decreasing a dividend. Inflation has significant contribution to the dividend policy maker

decision according to the status of companies as making profit or loss they concluded.

Tobias (2209) in their study of dividend policy and inflation in Australia: results from

cointegration tests examined the relationship between dividends and inflation in Australia by

testing for cointegration between these two variables. The results of the tests indicate that

inflation is contributing to dividend growth. This finding can be interpreted in different ways.

Trying to follow a dividend policy which is perceived to be optimal Australian firms may, for

example, believe that there is a desirable level of real dividend income to be paid out to their

investors. A second possible interpretation of the results would be that inflation simply increases

the nominal volume of corporate earnings and thereby leads to higher dividend payments.

Khurram and Muhammad (2013) analyzed the relationship that exists between stock prices and

cost of equity with inflation. A sample of fifty three firms was selected, for which data was

collected covering a period of ten years from 2000 – 2009. A combination of both time series

analysis and WLS panel regression were used to examine the relationship. The findings of the

study suggest that a positive relationship exists between stock prices and inflation, a negative

relationship between cost of equity and inflation.

2.10 Summary of Literature Review

The review of literature reveals studies examining the effect of inflation and profit on Decision

making. From the above literature review, we can see that most of these people concentrated on

the impact inflation has on interest rate, dividend, among others on profit which is not in

consistent with this study. This study focuses to determine the extent to which lending decision

in Nigerian banks were affected by inflation and also, how reported profits under inflationary

period affect investment decision of Nigerian banks between 2006 to 2011. To the best of

researchers knowledge, no Nigerian had studied on this perspective empirically. This fills the

gap.

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Institutions, London: Prentice-Hall, International Limited.

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Cambridge, Pitman Publishing Ltd.

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Her Majesty Stationery Office (1975), Inflation Accounting, London: The Sandiland Reports.

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Document, London.

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http://www.munknee.com/2012/02/how-inflationary-and-deflationary-outcomes-might-affect-

your-bullion-and-mining-shares/

http://www.stockopedia.co.uk/content/inflation-deflation-and-precious-metals-what-a-future-

might-look-like-for-your-bullion-and-your-mining-shares-62642/

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http://nraombakc.blogspot.com/2012/03/estimating-aggregate-operating-profit.html

Ian, Cooper (2003) Inflation and Financial Decision, Journal of Monetary Economics 20.

Inflation and Deflation http://www.uefap.com/vocab/exercise/awl/inflat.htm

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Review of Economics and Statistics.

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CHAPTER THREE

METHODOLOGY

3.1 RESEARC-H DESIGN

This research basically, related inflation to profitability and it’s implication on decision making

and therefore, relied heavily on historic data. The data that were used in the analysis were

generated from annual financial reports of the sampled banking firms between the period of 2006

to 2011. Therefore, this research employed the Ex Post Facto research design. This is because it

involves events which have taken place.

3.2 NATURE AND SOURCES OF DATA

This research made use of data from the balance sheet and income statements of sampled firms,

and information from the Central Bank statistical bulletin. Basically, the nature and sources of

data for the analysis of this study was secondary data. This is because it was ideal in answering

our research questions and to empirically test our research hypotheses. Such financial statements

were sourced, among others, from the firm’s corporate headquarters and websites; as well as the

zonal offices of the Nigerian Stock Exchange Onitsha.

3.3 POPULATION OF THE STUDY

The population of the study consists of all the banks quoted in the Nigerian Stock Exchange.

These banks are fifteen, namely; Access, Diamond, ETI, FBN, FCMB, Fidelity, Guaranty, Skye,

Stanbic, Sterling, UBA, UBN, Unity, WEMA and Zenith Banks.

3.4 SAMPLE SIZE OF THE STUDY

In determining sample size of a study, Nwana (1981) in Onwumere (2009) noted that samples

should be calculated as thus;

• 40% of population if the population is in few hundreds and below

• 20% of population if the population is in many hundreds

• 10% of the population if the population is in a few thousands

• 5% of the population if the population is in several thousands.

Using this, the sample size of the study is calculated as 40% of 15 banks. That is,

40 x 15 = 6

100

Hence, the sample size of the study is 6 banks.

Based on this, three first generation banks ( First Bank, Union bank, UBA ) and three new

generation banks (Access Bank, Diamond Bank, and Zenith Bank) were selected for the study.

3.7 TECHNIQUES OF ANALYSIS

For the analysis of the gathered data, Standard Ordinary Least Squares (OLS) were applied to a

panel series of data to test all the hypotheses. The signs of the coefficients were relied upon in

describing the direction and strength of linear relationship between variables while the t-statistics

and p-value were relied upon in determining the magnitude of the effect between inflation,

lending rate, profit, investment, gearing and solvency in the collection of our data series.

3.8 MODEL SPECIFICATION

The linear regression model was used for the hypotheses one and three. The general model is:

Y = α + βX + e … (1)

where; Y = Dependent variable

X = Independent Variable

α = constant

β = coefficient of independent variable

e = error margin

Adopting this to the study, the models for hypotheses one and three are:

Hypothesis One

LR = α + βIn + e … (2)

where; LR = Lending rate (dependent variable)

In = Inflation (independent variable)

α = constant

β = coefficient of independent variable (inflation)

e = error margin

Hypothesis Two

P = α + βIn + e … (3)

where; P = Profit (dependent variable)

In = Inflation (independent variable)

α = constant

β = coefficient of independent variable (inflation)

e = error margin

Hypothesis Three

INV = α + βIn + e

where; INV = Investment (dependent variable)

In = Inflation (independent variable)

α = constant

β = coefficient of independent variable (inflation)

e = error margin

Hypothesis four

GS=a+ βin+e

Where;GS=Gearing and solvency[Dependent variable]

In=inflation [independent variable

a=constant

β =coefficient of indepensdent variable [inflation]

e=error margin

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CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 INTRODUCTION

The study relied heavily on the secondary data generated the Statement of Accounts and Annual

Reports of six (6) banks in Nigeria; namely: Access Bank, Diamond Bank, First Bank, Union

Bank, UBA, and Zenith Bank. The Equity, Total Assets, Profit, Investment, Gearing and

Solvency were extracted used in the test of the various hypotheses. Also Inflation rate was

extracted from the Securities and Exchange Commission Statistical Bulletin and Lending rate

was extracted from the CBN Statistical Bulletin. These values are presented in Appendices 1-8.

4.2 TEST OF HYPOTHESES

In testing hypotheses one and two, the summary tables have the following notations;

R = Regression Coefficient R2 = Coefficient of determination

DW = Durbin Watson value RegSS = Regression Sum of Squares

ResSS = Residual Sum of Squares F = F (ANOVA) value

Sig. = Significance value of F-value α = Model Constant

β = Coefficient of Independent variables t = t-value

4.2.1 Test of Hypothesis One

There is no positive and significant relationship between lending decision and inflation on

Nigerian banks

Result

LR = 3.395 + 0.482In + 0.495

R = 0.438 R2 = 0.192

DW = 1.310 RegSS = 10.190

ResSS = 42.945 F = 0.949

Sig. = 0.385 t-value = 0.974 (See Appendix 9 for details)

R, the correlation coefficient, which has a value of 0.0438 indicates that there is an average

relationship between the Lending Rate and the independent variable (Inflation). R square, the

coefficient of determination, shows that 19.2% of the variation in the dependent variable is

explained by the model. The Durbin Watson value of 1.310 indicates there is no

autocorrelation.

The regression sum of squares (10.190) is less than the residual sum of squares (42.945) which

indicates that fewer of the variation in the dependent variable that is explained by the model.

The significance value of the F statistics (0.385) is greater than 0.05, which means that the

variation explained by the model is due to chance.The IN coefficient of 0.482 indicates a positive

relationship between Inflation and Lending Rate, which is not statistically significant (with t =

0.974).

These results reveal that Inflation has a positive impact with Lending Rate. However, this

impact is not significant. Therefore, the null hypothesis is accepted. Hence, there is no

significant positive relationship between lending decision and inflation on Nigerian banks.

4.2.2 Test of Hypothesis Two

Inflation has not adversely affected reported profits on Nigerian banks within 2006 – 2011

fiscal year

In testing this hypothesis, inflation was regressed against the reported profits of the six (6)

selected banks. The results are presented in Table 1. A bank by bank analysis is presented to

show whether inflation has adversely affected reported profits in each bank. Also, an aggregate

analysis is presented.

Table 1: Summarised Regression Results for Hypothesis Two

Bank

Aggregate

Result

Access

Bank

Diamond

Bank

First

Bank

Union

Bank UBA

Zenith

Bank

R 0.127 0.423 0.272 0.810 0.065 0.340 0.734

R2 0.016 0.179 0.074 0.656 0.004 0.115 0.538

DW 3.190 3.190 1.208 2.566 2.905 0.600 1.918

RegSS 1.505E9 6.207E7 5.597E7 1.698E8 3.839E8 2.017E8 4.997E8

ResSS 9.143E10 2.844E8 6.992E8 8.892E7 9.189E10 1.546E9 4.288E8

F 0.066 0.655 0.320 5.727 0.008 0.522 4.661

Sig. 0.810 0.478 0.602 0.096 0.935 0.510 0.097

Α -13667.371 -3008.956 -10524.362 4001.443 3710.541 -11383.972 -8875.477

βIn 5855.864 1272.286 1129.181 1972.026 -3204.631 2143.811 3373.887

t-value 0.257 0.809 0.566 2.393 -0.091 0.722 2.159

Source: See Appendix 10

Analysis of Aggregate Result

R, the correlation coefficient, which has a value of 0.127 indicates that there is a weak

relationship between the aggregated Profit and the independent variable (Inflation). R square,

the coefficient of determination, shows that 1.6% of the variation in the dependent variable is

explained by the model. The Durbin Watson value of 3.19 indicates there is autocorrelation.

The regression sum of squares (1.505E9) is less than the residual sum of squares (9.143E10)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.810) is greater than 0.05, which means that

the variation explained by the model is due to chance. TheINcoefficient of 5855.864 indicates a

positive relationship between Profit and Inflation, which is not statistically significant (with t =

0.257).

These results reveal that the aggregated Profit of the six (6) banks is impacted upon positively by

Inflation. However, this impact is not significant, as such does not enhance profit. Hence, the

aggregated profit is not significantly, though positively, influenced by Inflation.

Analysis of Access Bank

R, the correlation coefficient, which has a value of 0.423 indicates that there is an average

relationship between the Profit of Access Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 17.9% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 3.19 indicates there is

autocorrelation.

The regression sum of squares (6.207E7) is less than the residual sum of squares (2.844E8)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.478) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 1272.286 indicates a

positive relationship between Access Bank’s Profit and Inflation, which is not statistically

significant (with t = 0.809).

These results reveal that Access Bank’s Profit is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance profit. Hence, inflation, though

positively, has not significantly influenced profit in Access Bank.

Analysis of Diamond Bank

R, the correlation coefficient, which has a value of 0.272 indicates that there is a weak

relationship between the Profit of Diamond Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 7.4% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 1.208 indicates there is no

autocorrelation.

The regression sum of squares (5.597E7) is less than the residual sum of squares (6.992E8)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.602) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 1129.181 indicates a

positive relationship between Diamond Bank’s Profit and Inflation, which is not statistically

significant (with t = 0.566).

These results reveal that Diamond Bank’s Profit is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance profit. Hence, inflation, though

positively, has not significantly influenced profit in Diamond Bank.

Analysis of First Bank

R, the correlation coefficient, which has a value of 0.810 indicates that there is a strong

relationship between the Profit of First Bank and the independent variable (Inflation). R square,

the coefficient of determination, shows that 65.6% of the variation in the dependent variable is

explained by the model. The Durbin Watson value of 2.566 indicates there is autocorrelation.

The regression sum of squares (1.698E8) is greater than the residual sum of squares (8.892E7)

which indicates that the more of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.096) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 1972.026 indicates a

positive relationship between First Bank’s Profit and Inflation, which is statistically significant

(with t = 2.393).

These results reveal that First Bank’s Profit is impacted upon positively and significantly by

Inflation. Hence, inflation has positively and significantly influenced profit in First Bank.

Analysis of Union Bank

R, the correlation coefficient, which has a value of 0.065 indicates that there is an extremely

weak relationship between the Profit of Union Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 0.4% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 2.905 indicates there is

autocorrelation.

The regression sum of squares (3.839E8) is less than the residual sum of squares (9.189E10)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.935) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of -3204.631 indicates

a negative relationship between Union Bank’s Profit and Inflation, which is not statistically

significant (with t = -0.091).

These results reveal that Union Bank’s Profit is impacted upon negatively by Inflation.

However, this impact is not significant. Hence, inflation, though negatively, has not significantly

influenced profit in Union Bank.

Analysis of UBA

R, the correlation coefficient, which has a value of 0.340 indicates that there is a weak

relationship between the Profit of UBA and the independent variable (Inflation). R square, the

coefficient of determination, shows that 11.5% of the variation in the dependent variable is

explained by the model. The Durbin Watson value of 0.600 indicates there is no autocorrelation.

The regression sum of squares (2.017E8) is less than the residual sum of squares (1.546E9)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.510) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 2143.811 indicates a

positive relationship between UBA’s Profit and Inflation, which is not statistically significant

(with t = 0.722).

These results reveal that UBA’s Profit is impacted upon positively by Inflation. However, this

impact is not significant, as such does not enhance profit. Hence, inflation, though positively,

has not significantly influenced profit in UBA.

Analysis of Zenith Bank

R, the correlation coefficient, which has a value of 0.734 indicates that there is a strong

relationship between the Profit of Zenith Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 53.8% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 1.918 indicates there is no

autocorrelation.

The regression sum of squares (4.997E8) is greater than the residual sum of squares (4.288E8)

which indicates that the more of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.097) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 3373.887 indicates a

positive relationship between Zenith Bank’s Profit and Inflation, which is statistically significant

(with t = 2.159).

These results reveal that Zenith Bank’s Profit is impacted upon positively and significantly by

Inflation.

Decision

Based on the analysis presented above, only First Bank’s and Zenith Bank’s profit were

significantly and positively impacted upon by Inflation. The impact of Inflation on Profit for the

other banks was not significant. This reveals that it could not be established that inflation has

adversely affected reported profits on Nigerian banks within 2006 to 2011 fiscal year. To this

end, the null hypothesis is accepted.

4.2.3 Test of Hypothesis Three

Investment decisions within the reported profits of Nigerian banks have no direct

relationship with inflation within the period under review

In testing this hypothesis, inflation was regressed against the investment decisions of the six (6)

selected banks. The results are presented in Table 2. A bank by bank analysis as well as an

aggregate analysis is presented.

Table 2: Summarized Regression Results for Hypothesis Three

Bank

Aggregate

Result Access Bank

Diamond

Bank First Bank

Union

Bank UBA

Zenith

Bank

R 0.411 0.496 0.676 0.420 0.122 0.185 0.260

R2 0.169 0.246 0.457 0.176 0.015 0.034 0.068

DW 1.372 0.900 1.960 1.186 1.246 0.490 0.639

RegSS 1.879E11 2.627E9 6.823E8 8.100E9 9.416E8 6.374E9 4.036E9

ResSS 9.235E11 8.061E9 8.118E8 3.790E10 6.218E10 1.798E11 5.575E10

F 0.814 0.652 1.681 0.641 0.030 0.142 0.290

Sig. 0.418 0.504 0.324 0.482 0.878 0.726 0.619

Α

-

26280.896 -15346.575

-

12512.207 38607.292 89452.650 84903.646 32980.468

βIn 65418.936 8383.844 4006.718 13621.873 5019.088 12050.467 9589.150

t-value 0.902 0.807 1.296 0.801 0.174 0.377 0.538

Source: See Appendix 11

Analysis of Aggregate Result

R, the correlation coefficient, which has a value of 0.411 indicates that there is an average

relationship between the aggregated Investment and the independent variable (Inflation). R

square, the coefficient of determination, shows that 16.9% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 1.372 indicates there is

autocorrelation.

The regression sum of squares (1.879E11) is less than the residual sum of squares (9.235E11)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.418) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 65418.936 indicates

a positive relationship between Profit and Inflation, which is not statistically significant (with t =

0.902).

These results reveal that the aggregated Investment of the six (6) banks is impacted upon

positively by Inflation. However, this impact is not significant, as such does not enhance

investment. Hence, the aggregated investment is not significantly, though positively, influenced

by Inflation.

Analysis of Access Bank

R, the correlation coefficient, which has a value of 0.496 indicates that there is an average

relationship between the Investment of Access Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 24.6% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 0.900 indicates there is

autocorrelation.

The regression sum of squares (2.627E9) is less than the residual sum of squares (8.061E9)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.504) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 8383.844 indicates a

positive relationship between Access Bank’s Investment and Inflation, which is not statistically

significant (with t = 0.807).

These results reveal that Access Bank’s Investment is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance Investment. Hence, inflation,

though positively, has not significantly influenced Investment in Access Bank.

Analysis of Diamond Bank

R, the correlation coefficient, which has a value of 0.676 indicates that there is an average

relationship between the Investment of Diamond Bank and the independent variable (Inflation).

R square, the coefficient of determination, shows that 45.7% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 1.960 indicates there is

autocorrelation.

The regression sum of squares (6.823E8) is less than the residual sum of squares (8.118E8)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.324) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 4006.718 indicates a

positive relationship between Access Bank’s Investment and Inflation, which is not statistically

significant (with t = 1.296).

These results reveal that Diamond Bank’s Investment is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance Investment. Hence, inflation,

though positively, has not significantly influenced Investment in Diamond Bank.

Analysis of First Bank

R, the correlation coefficient, which has a value of 0.420 indicates that there is an average

relationship between the Investment of First Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 17.6% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 1.186 indicates there is

autocorrelation.

The regression sum of squares (8.100E9) is less than the residual sum of squares (3.790E10)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.482) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 13621.873 indicates

a positive relationship between First Bank’s Investment and Inflation, which is not statistically

significant (with t = 0.801).

These results reveal that First Bank’s Investment is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance Investment. Hence, inflation,

though positively, has not significantly influenced Investment in First Bank.

Analysis of Union Bank

R, the correlation coefficient, which has a value of 0.122 indicates that there is a weak

relationship between the Investment of Union Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 1.5% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 1.246 indicates there is

autocorrelation.

The regression sum of squares (9.416E8) is less than the residual sum of squares (6.218E10)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.030) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 5019.088 indicates a

positive relationship between Union Bank’s Investment and Inflation, which is not statistically

significant (with t = 0.174).

These results reveal that Union Bank’s Investment is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance Investment. Hence, inflation,

though positively, has not significantly influenced Investment in Union Bank.

Analysis of UBA

R, the correlation coefficient, which has a value of 0.185 indicates that there is an weak

relationship between the Investment of UBA Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 3.4% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 0.490 indicates there is

autocorrelation.

The regression sum of squares (6.374E9) is less than the residual sum of squares (1.798E11)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.726) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 12050.467 indicates

a positive relationship between UBA’s Investment and Inflation, which is not statistically

significant (with t = 0.377).

These results reveal that UBA’s Investment is impacted upon positively by Inflation. However,

this impact is not significant, as such does not enhance Investment. Hence, inflation, though

positively, has not significantly influenced Investment in UBA.

Analysis of Zenith Bank

R, the correlation coefficient, which has a value of 0.260 indicates that there is a weak

relationship between the Investment of Zenith Bank and the independent variable (Inflation). R

square, the coefficient of determination, shows that 6.8% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 0.639 indicates there is

autocorrelation.

The regression sum of squares (4.036E9) is less than the residual sum of squares (5.575E10)

which indicates that the fewer of the variation in the dependent variable is explained by the

model. The significance value of the F statistics (0.619) is greater than 0.05, which means that

the variation explained by the model is due to chance. The IN coefficient of 9589.150indicates a

positive relationship between Union Bank’s Investment and Inflation, which is not statistically

significant (with t = 0.538).

These results reveal that Zenith Bank’s Investment is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance Investment. Hence, inflation,

though positively, has not significantly influenced Investment in Zenith Bank.

Decision

Based on the analysis presented above, the impact of Inflation on Investment for all the banks

was not significant. To this end, investment decisions within the reported profits of Nigerian

banks have no direct relationship with inflation within the period under review. Hence, the null

hypothesis is accepted.

4.2.4 Test of Hypothesis Four

Inflation on other decision factors (Gearing and Solvency) has no significant relationship

on reported profit on Nigerian banks

In testing this hypothesis, Gearing and Solvency was regressed against the reported profit of the

six (6) selected banks. The results are presented in Table 3. A bank by bank analysis and an

aggregate analysis is presented.

Table 3: Summarised Regression Results for Hypothesis Four

Bank

Aggregate

Result

Access

Bank

Diamond

Bank

First

Bank

Union

Bank UBA

Zenith

Bank

R 0.744 0.546 0.050 0.967 0.350 0.142 0.898

R2 0.553 0.298 0.002 0.936 0.123 0.020 0.806

DW 1.998 1.488 0.819 1.422 1.745 2.185 2.096

RegSS 0.001 0.007 0.000 0.023 0.015 0.000 0.004

ResSS 0.001 0.015 0.041 0.002 0.106 0.005 0.001

F 4.954 0.848 0.010 43.601 0.279 0.082 16.593

Sig. 0.090 0.454 0.926 0.007 0.650 0.788 0.015

Α 0.078 0.044 0.098 -0.068 0.174 0.099 0.078

βIn 0.006 0.013 0.002 0.023 -0.020 0.002 0.009

t-value 2.226 0.921 0.100 6.603 -0.528 0.287 4.073

Source: See Appendix 12

Analysis of Aggregate Result

R, the correlation coefficient, which has a value of 0.744 indicates that there is a strong

relationship between the aggregated Gearing and Solvency and the independent variable

(Inflation). R square, the coefficient of determination, shows that 55.3% of the variation in the

dependent variable is explained by the model. The Durbin Watson value of 1.998 indicates

there is no autocorrelation.

The regression sum of squares (0.001) is equal to the than the residual sum of squares (0.001)

which indicates that the variation in the dependent variable that is explained by the model is the

same as that not explained by the variable. The significance value of the F statistics (0.090) is

greater than 0.05, which means that the variation explained by the model is due to chance. The

IN coefficient of 0.006 indicates a positive relationship between Gearing and Solvency and

Inflation, which is statistically significant (with t = 2.226).

These results reveal that the aggregated Gearing and Solvency of the six (6) banks is impacted

upon positively by Inflation.

Analysis of Access Bank

R, the correlation coefficient, which has a value of 0.546 indicates that there is an average

relationship between the Gearing and Solvency of Access Bank and the independent variable

(Inflation). R square, the coefficient of determination, shows that 29.8% of the variation in the

dependent variable is explained by the model. The Durbin Watson value of 1.488 indicates there

is no autocorrelation.

The regression sum of squares (0.007) is less than the residual sum of squares (0.015) which

indicates that the fewer of the variation in the dependent variable is explained by the model. The

significance value of the F statistics (0.454) is greater than 0.05, which means that the variation

explained by the model is due to chance. The IN coefficient of 0.013 indicates a positive

relationship between Access Bank’s Gearing and Solvency and Inflation, which is not

statistically significant (with t = 0.921).

These results reveal that Access Bank’s Gearing and Solvency is impacted upon positively by

Inflation. However, this impact is not significant, as such does not enhance Gearing and

Solvency. Hence, inflation, though positively, has not significantly influenced Gearing and

Solvency in Access Bank.

Analysis of Diamond Bank

R, the correlation coefficient, which has a value of 0.050 indicates that there is an extremely

weak relationship between the Gearing and Solvency of Diamond Bank and the independent

variable (Inflation). R square, the coefficient of determination, shows that 0.2% of the variation

in the dependent variable is explained by the model. The Durbin Watson value of 0.819

indicates there is no autocorrelation.

The regression sum of squares (0.000) is less than the residual sum of squares (0.041) which

indicates that the fewer of the variation in the dependent variable is explained by the model. The

significance value of the F statistics (0.926) is greater than 0.05, which means that the variation

explained by the model is due to chance. The IN coefficient of 0.002 indicates a positive

relationship between Diamond Bank’s Gearing and Solvency and Inflation, which is not

statistically significant (with t = 0.100).

These results reveal that Diamond Bank’s gearing and Solvency is impacted upon positively by

Inflation. However, this impact is not significant, as such does not enhance Gearing and

Solvency. Hence, inflation, though positively, has not significantly influenced Gearing and

Solvency in Diamond Bank.

Analysis of First Bank

R, the correlation coefficient, which has a value of 0.967 indicates that there is an extremely

strong relationship between the Gearing and Solvency of First Bank and the independent variable

(Inflation). R square, the coefficient of determination, shows that 93.6% of the variation in the

dependent variable is explained by the model. The Durbin Watson value of 1.422 indicates there

is no autocorrelation.

The regression sum of squares (0.023) is greater than the residual sum of squares (0.002) which

indicates that the more of the variation in the dependent variable is explained by the model. The

significance value of the F statistics (0.007) is less than 0.05, which means that the variation

explained by the model is not due to chance. The IN coefficient of 0.023indicates a positive

relationship between Access Bank’s Gearing and Solvency and Inflation, which is not

statistically significant (with t = 6.603).

These results reveal that First Bank’s gearing and Solvency is impacted upon positively and

significantly by Inflation.

Analysis of Union Bank

R, the correlation coefficient, which has a value of 0.350 indicates that there is a weak

relationship between the Gearing and Solvency of Union Bank and the independent variable

(Inflation). R square, the coefficient of determination, shows that 12.3% of the variation in the

dependent variable is explained by the model. The Durbin Watson value of 1.745 indicates there

is no autocorrelation.

The regression sum of squares (0.015) is less than the residual sum of squares (0.106) which

indicates that the fewer of the variation in the dependent variable is explained by the model. The

significance value of the F statistics (0.650) is greater than 0.05, which means that the variation

explained by the model is due to chance. The IN coefficient of -0.020 indicates a negative

relationship between Union Bank’s Gearing and Solvency and Inflation, which is not statistically

significant (with t = -0.528).

These results reveal that Union Bank’s Gearing and Solvency is impacted upon negatively by

Inflation. However, this impact is not significant, as such does not enhance Gearing and

Solvency. Hence, inflation, though negatively, has not significantly influenced Gearing and

Solvency in Union Bank.

Analysis of UBA

R, the correlation coefficient, which has a value of 0.142 indicates that there is a weak

relationship between the Gearing and Solvency of UBA and the independent variable (Inflation).

R square, the coefficient of determination, shows that 2% of the variation in the dependent

variable is explained by the model. The Durbin Watson value of 2.185 indicates there is

autocorrelation.

The regression sum of squares (0.007) is less than the residual sum of squares (0.015) which

indicates that the fewer of the variation in the dependent variable is explained by the model. The

significance value of the F statistics (0.788) is greater than 0.05, which means that the variation

explained by the model is due to chance. The IN coefficient of 0.002 indicates a positive

relationship between UBA’s Gearing and Solvency and Inflation, which is not statistically

significant (with t = 0.287).

These results reveal that UBA’s Gearing and Solvency is impacted upon positively by Inflation.

However, this impact is not significant, as such does not enhance Gearing and Solvency. Hence,

inflation, though positively, has not significantly influenced Gearing and Solvency in UBA.

Analysis of Zenith Bank

R, the correlation coefficient, which has a value of 0.898 indicates that there is a strong

relationship between the Gearing and Solvency of Zenith Bank and the independent variable

(Inflation). R square, the coefficient of determination, shows that 80.6% of the variation in the

dependent variable is explained by the model. The Durbin Watson value of 2.096 indicates there

is autocorrelation.

The regression sum of squares (0.004) is greater than the residual sum of squares (0.001) which

indicates that the more of the variation in the dependent variable is explained by the model. The

significance value of the F statistics (0.015) is less than 0.05, which means that the variation

explained by the model is due to chance. The IN coefficient of 0.009 indicates a positive

relationship between Zenith Bank’s Gearing and Solvency and Inflation, which is not statistically

significant (with t = 4.073).

These results reveal that Zenith Bank’s Gearing and Solvency is impacted upon positively and

significantly by Inflation.

Decision

Based on the analysis presented above, only First Bank’s and Zenith Bank’s Gearing and

Solvency were significantly and positively impacted upon by Inflation. The impact of Inflation

on Gearing and Solvency for the other banks was not significant. Hence, Inflation on other

decision factors (Gearing and Solvency) has no significant relationship on reported profit on

Nigerian banks. Hence, the null hypothesis is accepted.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION, RECOMMENDATIONS,

AND AREAS FOR FURTHER RESEARCH

5.1 SUMMARY OF FINDINGS

The findings include the following:

1. The regression coefficient test shows that aggregate F statistics (0.385) is greater than

0.05 given t-value of 0.974, therefore there is no significant positive relationship between

lending decision and inflation on Nigerian banks.

2. The regression coefficient test shows that aggregate F statistics (0.066) is greater than

0.05 given a t-value of 0.257, hence it is revealed that it could not be established that

inflation has adversely affected reported profits on Nigerian banks within 2006 to 2011

fiscal year.

3. The regression coefficient test shows that aggregate F statistics (0.814) is greater than

0.05 given t-value of 0.902, thus investment decisions within the reported profits of

Nigerian banks have no direct relationship with inflation within the period under review.

4. The regression coefficient test shows that aggregate F statistics (4.954) is greater than

0.05 given a t-value of 2.226, therefore Inflation on other decision factors (Gearing and

Solvency) has no significant relationship on reported profit on Nigerian banks.

5.2 CONCLUSION

Based on this study, the inflation and reported profit: implication on decision making

underscores much relevance in Nigerian banks. As a matter of fact the relationship between

inflation and accounting profit is obvious because the increase or decrease of inflation

determine the favourability and unfavourability of the economic stability, measure of spending

and investment. Also the decision of organization obeys the trends and situation of the economy

either in lending or reported profits, investment decisions, gearing and solvency. Thus in the

presence of all these factors inflation and reported profit have negative influence on decision-

making.

5.3 RECOMMENDATIONS

The following suggestions can be of help in the minimizing the effects of inflation.

1. There should be a frantic effort to increase the expansionary policy mechanism as a tool to

checkmate lending decision in the economy.

2. Monetary and credit regulatory procedure should be maintain in line with real economic

growth and financial market needs.

3. There should be a reversal or transformation of the serious deterioration of national

productivity by increasing incentives for savings and investment.

4. The government and organization partnering effort is also required in controlling the economic

growth through the monetary policy.

CONTRIBUTION TO KNOWLEDGE

These work tells us that inflation is significantly aline (integrated to) with profit maximization as

against profit minimization. Also it show a way to solve issue of fluctuations and policy

framework to the economy.

AREA OF FURTHER STUDIES

1. Determinance of inflation and profit maximization in organization performance.

2. The impact of inflation in the growth and development of financial sector.

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APPENDIX 1

FIRST BANK’S EQUITY, TOTAL ASSETS, GEARING RATIO, INVESTMENT AND

PROFIT

Equity Asset

gearing ratio

(equity/aset) profit investment

2006 60980 540129 0.112899 16053 63729

2007 77351 762881 0.101393 18355 135525

2008 339847 1165461 0.291599 30473 164928

2009 351054 1667422 0.210537 35074 216447

2010 340735 1957258 0.174088 26936 350713

2011 - - - - -

APPENDIX 2

UNION BANK’S EQUITY, TOTAL ASSETS, GEARING RATIO, INVESTMENT AND

PROFIT

Equity Asset

gearing ratio

(equity/aset) profit investment

2006 - - - - -

2007 96630 619800 0.155905 12126 60333

2008 64603 907074 0.071221 24737 72602

2009 -253910 921230 -0.27562 -286168 90287

2010 -135894 845231 -0.16078 118016 363459

2011 - - - - -

APPENDIX 3

UBA BANK’S EQUITY, TOTAL ASSETS, GEARING RATIO, INVESTMENT AND

PROFIT

Equity Asset

gearing ratio

(equity/aset) profit investment

2006 47621 851241 0.055943 11468 13030

2007 164821 1102348 0.149518 19831 80228

2008 188155 1520091 0.123779 40002 105454

2009 187719 1400879 0.134001 12889 199161

2010 187730 1432632 0.131039 2167 374857

2011 170058 1655465 0.102725 -16385 513947

APPENDIX 4

ZENITH BANK’S EQUITY, TOTAL ASSETS, GEARING RATIO, INVESTMENT AND

PROFIT

Equity Asset

gearing ratio

(equity/aset) profit investment

2006 100401 610769 0.164385 11489 14582

2007 112833 883941 0.127648 17509 45524

2008 338483 1680032 0.201474 46524 71526

2009 328383 1573196 0.208736 18365 180285

2010 350414 1789158 0.195854 33335 209119

2011 360868 2154713 0.167478 37141 295347

APPENDIX 5

ACCESS BANK’S EQUITY, TOTAL ASSETS, GEARING RATIO, INVESTMENT AND

PROFIT

Equity Asset

gearing ratio

(equity/aset) profit investment

2006 - - - - -

2007 28385 328616 0.086377 5083 10564

2008 172002 1031812 0.166699 16056 64351

2009 184830 674865 0.273877 22886 91986

2010 182505 726961 0.251052 -880 154016

2011 - - - 12931 -

APPENDIX 6

DIAMOND BANK’S EQUITY, TOTAL ASSETS, GEARING RATIO, INVESTMENT

AND PROFIT

Equity Asset

gearing ratio

(equity/aset) profit investment

2006 30788 218866 0.140671 -332 5763

2007 53892 312250 0.172592 6931 18974

2008 116983 603327 0.193897 11822 38353

2009 116545 650892 0.179054 6931 56746

2010 64176 0 6522

2011 63537 0 -22188

APPENDIX 7

INFLATION RATES (2006 TO 2011)

YEAR INFLATION RATE

2006 8.6

2007 6.6

2008 15.1

2009 12.1

2010 11.8

2011 10.3

APPENDIX 8

LENDING RATES (2006 TO 2011)

YEAR LENDING RATE

2006 8.35

2007 8.10

2008 11.84

2009 12.85

2010 5.67

2011 4.64

APPENDIX 9

Regression Result for Test of Hypothesis One

Descriptive Statistics

Mean Std. Deviation N

Lendingrate 8.5750 3.25992 6

Inflation 10.7500 2.96294 6

Correlations

lendingrate inflation

Pearson Correlation lendingrate 1.000 .438

inflation .438 1.000

Sig. (1-tailed) lendingrate . .193

inflation .193 .

N lendingrate 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson

1 .438a .192 -.010 3.27663 1.310

a. Predictors: (Constant), inflation

b. Dependent Variable: lendingrate

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 10.190 1 10.190 .949 .385a

Residual 42.945 4 10.736

Total 53.135 5

a. Predictors: (Constant), inflation

b. Dependent Variable: lendingrate

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) 3.395 5.482 .619 .569

inflation .482 .495 .438 .974 .385

a. Dependent Variable: lendingrate

Residuals Statisticsa

Minimum Maximum Mean Std. Deviation N

Predicted Value 6.5754 10.6709 8.5750 1.42760 6

Residual -3.71818 3.62454 .00000 2.93070 6

Std. Predicted Value -1.401 1.468 .000 1.000 6

Std. Residual -1.135 1.106 .000 .894 6

a. Dependent Variable: lendingrate

APPENDIX 10

REGRESSION RESULT FOR TEST OF HYPOTHESIS TWO

RESULTS FOR FIRST BANK Descriptive Statistics

Mean Std. Deviation N

FBNprofit 25378.2000 8041.71870 5

inflation 10.8400 3.30348 5

Correlations

FBNprofit inflation

Pearson Correlation FBNprofit 1.000 .810

inflation .810 1.000

Sig. (1-tailed) FBNprofit . .048

inflation .048 .

N FBNprofit 5 5

inflation 5 5

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .810a .656 .542 5444.24338 2.566

a. Predictors: (Constant), inflation

b. Dependent Variable: FBNprofit

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 1.698E8 1 1.698E8 5.727 .096a

Residual 8.892E7 3 2.964E7

Total 2.587E8 4

a. Predictors: (Constant), inflation

b. Dependent Variable: FBNprofit

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) 4001.443 9258.211 .432 .695

inflation 1972.026 824.016 .810 2.393 .096

a. Dependent Variable: FBNprofit

RESULT FOR UNION BANK

Descriptive Statistics

Mean Std. Deviation N

UBNprofit -32822.2500 1.75375E5 4

Inflation 11.4000 3.52987 4

Correlations

UBNprofit inflation

Pearson Correlation UBNprofit 1.000 -.065

inflation -.065 1.000

Sig. (1-tailed) UBNprofit . .468

inflation .468 .

N UBNprofit 4 4

inflation 4 4

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .065a .004 -.494 2.14343E5 2.905

a. Predictors: (Constant), inflation

b. Dependent Variable: UBNprofit

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 3.839E8 1 3.839E8 .008 .935a

Residual 9.189E10 2 4.594E10

Total 9.227E10 3

a. Predictors: (Constant), inflation

b. Dependent Variable: UBNprofit

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) 3710.541 413783.203 .009 .994

inflation -3204.631 35058.191 -.065 -.091 .935

a. Dependent Variable: UBN profit

REGRESSION RESULT FOR UBA

Descriptive Statistics

Mean Std. Deviation N

UBAprofit 11662.0000 18698.77301 6

Descriptive Statistics

Mean Std. Deviation N

UBAprofit 11662.0000 18698.77301 6

inflation 10.7500 2.96294 6

Correlations

UBAprofit inflation

Pearson Correlation UBAprofit 1.000 .340

inflation .340 1.000

Sig. (1-tailed) UBAprofit . .255

inflation .255 .

N UBAprofit 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .340a .115 -.106 19662.66981 .600

a. Predictors: (Constant), inflation

b. Dependent Variable: UBAprofit

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 2.017E8 1 2.017E8 .522 .510a

Residual 1.546E9 4 3.866E8

Total 1.748E9 5

a. Predictors: (Constant), inflation

b. Dependent Variable: UBAprofit

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -11383.972 32898.236 -.346 .747

inflation 2143.811 2967.802 .340 .722 .510

a. Dependent Variable: UBAprofit

REGRESSION RESULT FOR ZENITH BANK

Descriptive Statistics

Mean Std. Deviation N

Zenithprofit 27393.8333 13626.89606 6

Inflation 10.7500 2.96294 6

Correlations

Zenithprofit inflation

Pearson Correlation Zenithprofit 1.000 .734

inflation .734 1.000

Sig. (1-tailed) Zenithprofit . .049

inflation .049 .

N Zenithprofit 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .734a .538 .423 10353.74145 1.918

a. Predictors: (Constant), inflation

b. Dependent Variable: Zenithprofit

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 4.997E8 1 4.997E8 4.661 .097a

Residual 4.288E8 4 1.072E8

Total 9.285E8 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Zenithprofit

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -8875.447 17323.173 -.512 .635

inflation 3373.887 1562.751 .734 2.159 .097

a. Dependent Variable: Zenithprofit

REGRESSION RESULT FOR ACCESS BANK

Descriptive Statistics

Mean Std. Deviation N

Accessprofit 11215.2000 9307.02190 5

Inflation 11.1800 3.09629 5

Correlations

Accessprofit inflation

Pearson Correlation Accessprofit 1.000 .423

inflation .423 1.000

Sig. (1-tailed) Accessprofit . .239

inflation .239 .

N Accessprofit 5 5

inflation 5 5

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .423a .179 -.094 9736.67090 3.190

a. Predictors: (Constant), inflation

b. Dependent Variable: Accessprofit

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 6.207E7 1 6.207E7 .655 .478a

Residual 2.844E8 3 9.480E7

Total 3.465E8 4

a. Predictors: (Constant), inflation

b. Dependent Variable: Accessprofit

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -3008.956 18109.748 -.166 .879

inflation 1272.286 1572.313 .423 .809 .478

a. Dependent Variable: Accessprofit

REGRESSION RESULTS FOR DIAMOND BANK

Descriptive Statistics

Mean Std. Deviation N

Diamondprofit 1614.3333 12289.46561 6

Inflation 10.7500 2.96294 6

Correlations

Diamondprofit inflation

Pearson Correlation Diamondprofit 1.000 .272

inflation .272 1.000

Sig. (1-tailed) Diamondprofit . .301

inflation .301 .

N Diamondprofit 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .272a .074 -.157 13221.06763 1.208

a. Predictors: (Constant), inflation

b. Dependent Variable: Diamondprofit

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 5.597E7 1 5.597E7 .320 .602a

Residual 6.992E8 4 1.748E8

Total 7.552E8 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Diamondprofit

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -10524.362 22120.587 -.476 .659

Inflation 1129.181 1995.533 .272 .566 .602

a. Dependent Variable: Diamondprofit

AGGREGATE REGRESSION RESULTS

Descriptive Statistics

Mean Std. Deviation N

Aggregateprofit 49283.1667 1.36337E5 6

Inflation 10.7500 2.96294 6

Correlations

Aggregateprofit inflation

Pearson Correlation Aggregateprofit 1.000 .127

inflation .127 1.000

Sig. (1-tailed) Aggregateprofit . .405

inflation .405 .

N Aggregateprofit 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .127a .016 -.230 1.51189E5 3.190

a. Predictors: (Constant), inflation

b. Dependent Variable: Aggregateprofit

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 1.505E9 1 1.505E9 .066 .810a

Residual 9.143E10 4 2.286E10

Total 9.294E10 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Aggregateprofit

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -13667.371 252959.891 -.054 .960

inflation 5855.864 22819.914 .127 .257 .810

a. Dependent Variable: Aggregateprofit

APPENDIX 11

REGRESSION RESULT FOR TEST OF HYPOTHESIS THREE

REGRESSION RESULT FOR FIRST BANK Descriptive Statistics

Mean Std. Deviation N

FBNinvestment 186268.4000 1.07237E5 5

Inflation 10.8400 3.30348 5

Correlations

FBNinvestment inflation

Pearson Correlation FBNinvestment 1.000 .420

inflation .420 1.000

Sig. (1-tailed) FBNinvestment . .241

inflation .241 .

N FBNinvestment 5 5

inflation 5 5

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .420a .176 -.099 1.12397E5 1.186

a. Predictors: (Constant), inflation

b. Dependent Variable: FBNinvestment

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 8.100E9 1 8.100E9 .641 .482a

Residual 3.790E10 3 1.263E10

Total 4.600E10 4

a. Predictors: (Constant), inflation

b. Dependent Variable: FBNinvestment

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) 38607.292 191136.428 .202 .853

inflation 13621.873 17011.862 .420 .801 .482

a. Dependent Variable: FBNinvestment

REGRESSION RESULT FOR UNION BANK

Descriptive Statistics

Mean Std. Deviation N

UBNinvestment 146670.2500 1.45048E5 4

Inflation 11.4000 3.52987 4

Correlations

UBNinvestment inflation

Pearson Correlation UBNinvestment 1.000 .122

Inflation .122 1.000

Sig. (1-tailed) UBNinvestment . .439

Inflation .439 .

N UBNinvestment 4 4

Inflation 4 4

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .122a .015 -.478 1.76316E5 1.246

a. Predictors: (Constant), inflation

b. Dependent Variable: UBNinvestment

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 9.416E8 1 9.416E8 .030 .878a

Residual 6.218E10 2 3.109E10

Total 6.312E10 3

a. Predictors: (Constant), inflation

b. Dependent Variable: UBNinvestment

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) 89452.650 340374.205 .263 .817

inflation 5019.088 28838.541 .122 .174 .878

a. Dependent Variable: UBNinvestment

REGRESSION RESULT FOR UBA

Descriptive Statistics

Mean Std. Deviation N

UBAinvestment 214446.1667 1.92940E5 6

Inflation 10.7500 2.96294 6

Correlations

UBAinvestment inflation

Pearson Correlation UBAinvestment 1.000 .185

inflation .185 1.000

Sig. (1-tailed) UBAinvestment . .363

inflation .363 .

N UBAinvestment 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .185a .034 -.207 2.11987E5 .490

a. Predictors: (Constant), inflation

b. Dependent Variable: UBAinvestment

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 6.374E9 1 6.374E9 .142 .726a

Residual 1.798E11 4 4.494E10

Total 1.861E11 5

a. Predictors: (Constant), inflation

b. Dependent Variable: UBAinvestment

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) 84903.646 354682.360 .239 .823

inflation 12050.467 31996.460 .185 .377 .726

a. Dependent Variable: UBAinvestment

REGRESSION RESULT FOR ZENITH BANK

Descriptive Statistics

Mean Std. Deviation N

Zenithinvestment 136063.8333 1.09347E5 6

Inflation 10.7500 2.96294 6

Correlations

Zenithinvestment inflation

Pearson Correlation Zenithinvestment 1.000 .260

Inflation .260 1.000

Sig. (1-tailed) Zenithinvestment . .310

Inflation .310 .

N Zenithinvestment 6 6

Inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .260a .068 -.166 1.18055E5 .639

a. Predictors: (Constant), inflation

b. Dependent Variable: Zenithinvestment

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 4.036E9 1 4.036E9 .290 .619a

Residual 5.575E10 4 1.394E10

Total 5.978E10 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Zenithinvestment

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) 32980.468 197521.508 .167 .875

inflation 9589.150 17818.730 .260 .538 .619

a. Dependent Variable: Zenithinvestment

REGRESSION RESULT FOR ACCESS BANK

Descriptive Statistics

Mean Std. Deviation N

Accessinvestment 80229.2500 59688.27782 4

Inflation 11.4000 3.52987 4

Correlations

Accessinvestment inflation

Pearson Correlation Accessinvestment 1.000 .496

Inflation .496 1.000

Sig. (1-tailed) Accessinvestment . .252

Inflation .252 .

N Accessinvestment 4 4

Inflation 4 4

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .496a .246 -.131 63484.93715 .900

a. Predictors: (Constant), inflation

b. Dependent Variable: Accessinvestment

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 2.627E9 1 2.627E9 .652 .504a

Residual 8.061E9 2 4.030E9

Total 1.069E10 3

a. Predictors: (Constant), inflation

b. Dependent Variable: Accessinvestment

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -15346.575 122555.949 -.125 .912

inflation 8383.844 10383.674 .496 .807 .504

a. Dependent Variable: Accessinvestment

REGRESSION RESULT FOR DIAMOND BANK

Descriptive Statistics

Mean Std. Deviation N

Diamondinestment 29959.0000 22316.80418 4

Inflation 10.6000 3.76386 4

Correlations

Diamondinestment inflation

Pearson Correlation Diamondinestment 1.000 .676

Inflation .676 1.000

Sig. (1-tailed) Diamondinestment . .162

Inflation .162 .

N Diamondinestment 4 4

Inflation 4 4

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .676a .457 .185 20147.37363 1.960

a. Predictors: (Constant), inflation

b. Dependent Variable: Diamondinestment

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 6.823E8 1 6.823E8 1.681 .324a

Residual 8.118E8 2 4.059E8

Total 1.494E9 3

a. Predictors: (Constant), inflation

b. Dependent Variable: Diamondinestment

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -12512.207 34272.836 -.365 .750

inflation 4006.718 3090.466 .676 1.296 .324

a. Dependent Variable: Diamondinestment

AGGREGATE REGRESSION RESULT

Descriptive Statistics

Mean Std. Deviation N

Aggregateinvestment 676972.6667 4.71446E5 6

Inflation 10.7500 2.96294 6

Correlations

Aggregateinvestment inflation

Pearson Correlation Aggregateinvestment 1.000 .411

Inflation .411 1.000

Sig. (1-tailed) Aggregateinvestment . .209

Inflation .209 .

N Aggregateinvestment 6 6

Inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .411a .169 -.039 4.80482E5 1.372

a. Predictors: (Constant), inflation

b. Dependent Variable: Aggregateinvestment

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 1.879E11 1 1.879E11 .814 .418a

Residual 9.235E11 4 2.309E11

Total 1.111E12 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Aggregateinvestment

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -26280.896 803910.149 -.033 .975

inflation 65418.936 72522.014 .411 .902 .418

a. Dependent Variable: Aggregateinvestment

APPENDIX 13

REGRESSION RESULTS FOR TEST OF HYPOTHESIS FOUR

REGRESSION RESULT FOR FIRST BANK

Descriptive Statistics

Mean Std. Deviation N

FBNgs .1781 .07760 5

inflation 10.8400 3.30348 5

Correlations

FBNgs Inflation

Pearson Correlation FBNgs 1.000 .967

inflation .967 1.000

Sig. (1-tailed) FBNgs . .004

inflation .004 .

N FBNgs 5 5

inflation 5 5

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .967a .936 .914 .02273 1.422

a. Predictors: (Constant), inflation

b. Dependent Variable: FBNgs

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression .023 1 .023 43.601 .007a

Residual .002 3 .001

Total .024 4

a. Predictors: (Constant), inflation

b. Dependent Variable: FBNgs

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) -.068 .039 -1.764 .176

inflation .023 .003 .967 6.603 .007

a. Dependent Variable: FBNgs

REGRESSION RESULT FOR UNION BANK

Descriptive Statistics

Mean Std. Deviation N

UBNgs -.0523 .20021 4

Descriptive Statistics

Mean Std. Deviation N

UBNgs -.0523 .20021 4

inflation 11.4000 3.52987 4

Correlations

UBNgs Inflation

Pearson Correlation UBNgs 1.000 -.350

inflation -.350 1.000

Sig. (1-tailed) UBNgs . .325

inflation .325 .

N UBNgs 4 4

inflation 4 4

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .350a .123 -.316 .22969 1.745

a. Predictors: (Constant), inflation

b. Dependent Variable: UBNgs

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression .015 1 .015 .279 .650a

Residual .106 2 .053

Total .120 3

a. Predictors: (Constant), inflation

b. Dependent Variable: UBNgs

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) .174 .443 .392 .733

inflation -.020 .038 -.350 -.528 .650

a. Dependent Variable: UBNgs

REGRESSION RESULTS FOR UBA

Descriptive Statistics

Mean Std. Deviation N

UBAgs .1162 .03322 6

inflation 10.7500 2.96294 6

Correlations

UBAgs Inflation

Pearson Correlation UBAgs 1.000 .142

inflation .142 1.000

Sig. (1-tailed) UBAgs . .394

inflation .394 .

N UBAgs 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .142a .020 -.225 .03676 2.185

a. Predictors: (Constant), inflation

b. Dependent Variable: UBAgs

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression .000 1 .000 .082 .788a

Residual .005 4 .001

Total .006 5

a. Predictors: (Constant), inflation

b. Dependent Variable: UBAgs

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) .099 .062 1.610 .183

inflation .002 .006 .142 .287 .788

a. Dependent Variable: UBAgs

REGRESSION RESULTS FOR ZENITH

Descriptive Statistics

Mean Std. Deviation N

Zenithgs .1776 .03048 6

inflation 10.7500 2.96294 6

Correlations

Zenithgs Inflation

Pearson Correlation Zenithgs 1.000 .898

inflation .898 1.000

Sig. (1-tailed) Zenithgs . .008

inflation .008 .

N Zenithgs 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .898a .806 .757 .01502 2.096

a. Predictors: (Constant), inflation

b. Dependent Variable: Zenithgs

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression .004 1 .004 16.593 .015a

Residual .001 4 .000

Total .005 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Zenithgs

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) .078 .025 3.117 .036

Inflation .009 .002 .898 4.073 .015

a. Dependent Variable: Zenithgs

REGRESSION RESULTS FOR ACCESS BANK

Descriptive Statistics

Mean Std. Deviation N

Accessgs .1945 .08556 4

Inflation 11.4000 3.52987 4

Correlations

Accessgs inflation

Pearson Correlation Accessgs 1.000 .546

inflation .546 1.000

Sig. (1-tailed) Accessgs . .227

inflation .227 .

N Accessgs 4 4

inflation 4 4

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .546a .298 -.054 .08782 1.488

a. Predictors: (Constant), inflation

b. Dependent Variable: Accessgs

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression .007 1 .007 .848 .454a

Residual .015 2 .008

Total .022 3

a. Predictors: (Constant), inflation

b. Dependent Variable: Accessgs

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) .044 .170 .258 .820

inflation .013 .014 .546 .921 .454

a. Dependent Variable: Accessgs

REGRESSION RESULTS FOR DIAMOND BANK

Descriptive Statistics

Mean Std. Deviation N

Diamondgs .1144 .09028 6

Inflation 10.7500 2.96294 6

Correlations

Diamondgs inflation

Pearson Correlation Diamondgs 1.000 .050

inflation .050 1.000

Sig. (1-tailed) Diamondgs . .463

inflation .463 .

N Diamondgs 6 6

inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .050a .002 -.247 .10081 .819

a. Predictors: (Constant), inflation

b. Dependent Variable: Diamondgs

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression .000 1 .000 .010 .926a

Residual .041 4 .010

Total .041 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Diamondgs

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) .098 .169 .582 .592

Inflation .002 .015 .050 .100 .926

a. Dependent Variable: Diamondgs

AGGREGATE REGRESSION

Descriptive Statistics

Mean Std. Deviation N

Aggregategs .1372 .02212 6

Inflation 10.7500 2.96294 6

Correlations

Aggregategs inflation

Pearson Correlation Aggregategs 1.000 .744

Inflation .744 1.000

Sig. (1-tailed) Aggregategs . .045

Inflation .045 .

N Aggregategs 6 6

Inflation 6 6

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the

Estimate Durbin-Watson

1 .744a .553 .442 .01653 1.998

a. Predictors: (Constant), inflation

b. Dependent Variable: Aggregategs

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression .001 1 .001 4.954 .090a

Residual .001 4 .000

Total .002 5

a. Predictors: (Constant), inflation

b. Dependent Variable: Aggregategs

Coefficientsa

Model

Unstandardized Coefficients Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) .078 .028 2.803 .049

inflation .006 .002 .744 2.226 .090

a. Dependent Variable: Aggregategs